Earnings Call Transcript - BKYI Q2 2024

Operator, Operator

Good morning, everyone. Thank you for standing by and welcome to the BIO-key International First Quarter 2024 Conference Call. During management's prepared remarks, all participants will be in a listen-only mode. Afterward, listeners will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, August 15, 2024. I would like to turn the call over now to Bill Jones with Investor Relations. Please go ahead.

Bill Jones, Investor Relations

Thank you, Rocco. Our hosts today are BIO-Key's Chairman and CEO, Mike DePasquale, and CFO, Cecilia Welch. As a reminder, today's conference call and webcast, as well as answers to investor questions, include forward-looking statements which are subject to certain risks and uncertainties that can cause actual realized results to differ from those currently expected. Words such as anticipate, believe, estimate, expect, plan, project, or similar words generally express and identify forward-looking statements. Such forward-looking statements are made based on management's beliefs and assumptions using information currently available as of today pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete description of these and other risks that may affect future performance of the Company, please see risk factors in the company's annual report as filed on Form 10-K with the SEC. Listeners are cautioned not to place undue reliance on forward-looking statements which speak as of today's date only. BIO-Key undertakes no obligation to revise or disclose revisions to forward-looking statements to reflect circumstances or events that occur after today. Now let us hand the conference to Mike to begin.

Mike DePasquale, CEO

Thank you, Bill, and good morning. I appreciate you joining our call today. I'm happy to announce our Q2 results on schedule this quarter, with our Q2 release and 10-Q filing completed yesterday after market close. We're back to our usual reporting rhythm, which is great to see. After my remarks, Cecilia will give a brief summary of our financial performance, followed by a Q&A session with investors. Unfortunately, our Q2 revenue of $1.1 million was lower than last year's revenue of about $1.9 million, mainly due to delays in completing around $450,000 in software license contracts within our EMEA business. Additionally, services revenue dropped due to customizations and upgrades for a significant customer project that was projected for 2023 but didn't take place in 2024. On a positive note, our PortalGuard, Identity, and Access Management division continues to see growth, driven by deployments and project expansions in the healthcare and public sector as our existing customers and new clients utilize the innovative technical advancements we've achieved over the past year. Recent deployments include the City of Williamsburg, Virginia, which improved its Zero Trust security framework using BIO-key's Identity Bound Biometrics (IBB). For those unfamiliar, Zero Trust is a security approach that challenges the traditional belief that users and devices within a network can be inherently trusted, emphasizing ongoing verification to ensure top-notch security. This is where BIO-key's advanced biometric technology comes into play. IBB places each user at the core of cybersecurity, enabling authentication and identification while securely storing biometric data to prevent theft or misuse. This creates a distinctive biometric identity that is consistently used to confirm the identity of individuals taking action. Typically, we're speaking about fingerprints or palm scans, but our systems also support facial, voice, and iris recognition. The primary advantage of IBB is that it builds trust and accountability based on a person’s biometric identity, assuring organizations of each individual's genuine presence with complete transparency and, importantly, auditing capabilities. By developing a Zero Trust framework with BIO-Key's IBB, businesses reduce their vulnerability to attacks because our IBB authentication factors cannot be forgotten, shared, exchanged, stolen, or forged. Enterprise-controlled enrollment prevents account transfers and ensures that only authorized individuals can access account privileges. BIO-Key IBB also removes potential vulnerabilities associated with physical devices, contrasting local or device-based biometrics that are common on most mobile phones. Importantly, our patented technology also offers greater flexibility and user-friendliness, alongside a reduced total cost of ownership for Zero Trust environments and other uses, including passwordless workflows, remote workforces, customer IAM, mobile users, and shared workstations in call centers or any setting where mobile devices are banned. Given these benefits, BIO-Key has carved a strong position in regulated fields like healthcare, banking, defense, and the public sector. In Q2, our notable clients, the University of Iowa Hospital and Dayton Children's Hospital, expanded their BIO-Key PortalGuard deployments, and the Los Angeles LGBTQ center applied a BIO-Key badge tap authentication solution, highlighting the adaptability of our systems to cater to specific needs and applications. Emphasizing the strength of our solutions, BIO-Key received the Global Infrasec Hot Company Multifactor Authentication Award from Cyber Defense magazine at the RSA Conference this past May in San Francisco. In our last call, we talked about our recent product innovation, Passkey:YOU. We launched it in Q2, and early reactions from customers have been very positive, with several Fortune 500 prospects interested in the solution. Passkey:YOU addresses underserved workplace scenarios involving roving users who share workstations and supports passwordless, phoneless, and tokenless authentication. Traditional authentication methods rely on devices like smartphones for PINs or apps, or hardware tokens like Yubikeys. However, device-based solutions are often unsuitable for workplaces like manufacturing floors, retail environments, call centers, healthcare, and hospitality, where users need secure device access and phone usage is frequently restricted for safety, data privacy, or distraction reasons. FIDO tokens are another option, but equipping large numbers of workers with expensive FIDO tokens that need frequent replacement can be impractical and costly. Passkey:YOU brings BIO-Key's biometric authentication to a hosted passkey software solution, allowing users to utilize their hosted passkey with a simple fingerprint touch at any shared workstation. Users carry nothing, and Passkey:YOU offers unparalleled secure, phoneless, tokenless, and passwordless authentication. It integrates seamlessly into existing Zero Trust frameworks, including those of competitor and partner IAM platforms like Microsoft Entra, Okta, Ping, and Duo, without needing special configuration. This includes high-margin annual recurring revenues. This year, we've initiated a strategy to collaborate with larger IAM providers such as these, as well as SailPoint and ForgeRock. Passkey:YOU is a powerful, distinct tool we can introduce to these major platforms to better address their customers' needs. We believe Passkey:YOU has significant market potential due to its capability to resolve some of the most difficult IAM use cases and its compatibility with installed security infrastructures. We realize it will take some time for our partners and customers to fully evaluate this new solution. Therefore, while we do not anticipate any significant impact on our financial results this year, we are enthusiastic about the future of this unique offering. Today, we announced our PortalGuard IDaaS platform and IBB authentication solutions are now available on the Amazon Web Services marketplace, which has launched today. The marketplace serves as a digital catalog where customers can find, buy, and implement software solutions designed for AWS Cloud Services. By listing our solutions on the AWS marketplace, potential clients can quickly and easily purchase PortalGuard and our IBB solutions from anywhere globally. This provides a great opportunity to drive significant recurring revenues in the upcoming quarters. I’ve previously mentioned that BIO-Key solutions are increasingly crucial for businesses seeking cyber insurance or compliance with new SEC cybersecurity risk management and reporting regulations as well as government-mandated CISA regulations. These frameworks are pushing organizations to prioritize investments in securing access to their IT systems and data. Despite our revenues being lower than anticipated this quarter, we remain optimistic about the increasing recognition from enterprises about the need for secure Zero Trust device-less IAM solutions that lie at the core of BIO-Key's offerings. We are committed to driving revenue growth while working towards profitability and positive cash flow in the coming quarters. Notably, we are continuing to increase our high-margin annual recurring revenues, which have strong potential for future growth. Given our scale, our financial performance may remain inconsistent from quarter to quarter and year over year due to the timing of customer contracts and commitments. Additionally, our average sales value for prospects is rising significantly, which is a positive sign for larger deals and increased revenue opportunities, though it may lead to a longer sales cycle. Nonetheless, we are confident in our ability to achieve growth on a sequential basis throughout the year 2024, and we keep looking for cost reduction opportunities to support our journey toward profitability and positive cash flow. We're also exploring strategic opportunities to leverage our core strengths, products, and corporate resources to create value for our shareholders. We are dedicating significant time to this effort. We believe that our market cap of approximately $2.5 million does not accurately reflect the value of our technology, products, and our approximately $6 million in high-margin annual recurring revenue, indicating that our strategic value is much higher. Thus, the strategic value of our NASDAQ platform is significantly underestimated. For these reasons, we feel optimistic about our company's future and are thankful for the support and patience of all our shareholders. Now, I'll turn the call over to Cecilia for a financial review before we proceed to questions.

Cecilia Welch, CFO

Thank you. As Mike referenced earlier, we have filed our 10-Q yesterday and issued our earnings release. Now I'll review some of the financial highlights, as compared to our restated Q2 '23, and six months ended June 30, 2023 results. BIO-Key Q2 '24 revenues were $1.1 million, down from $1.9 million in Q2 '23. The current year period was impacted by software license orders from our domestic business and European subsidiaries sliding into the third quarter. The prior year period had benefited by approximately $200,000 for non-recurring services related to customizations and upgrades for one large customer. We also had one large recurring maintenance contract that did not renew in Q1 '24, which negatively impacted the current year top line revenue. Our gross profit and gross margin comparisons improved in the current year period, primarily due to the $1 million hardware reserve that was taken in Q2 '23 and the higher gross margin from services realized from Q2 '24. Excluding the impact of the reserve, the gross profit would have been higher in Q2 '23 because of higher revenues, but gross margins would still have improved to 77% in Q2 '24 from 69% realized in 2023, and this was due to the gross margin of services of 74% in Q2 '24 versus 42% in Q2 '23. On the expense side, we reduced total operating expenses by $168,000 in Q2 '24 relative to Q2 '23 due to reductions in administration and sales personnel, as well as lower headquarters expenses. These were partially offset by a $33,000 increase in research, development, and engineering related to new product development, reflecting lower costs in the year-ago hardware reserve. BIO-Key's net loss improved to $1.7 million, or $1 per share, in Q2 '24 from $2.6 million, or $4.71 per share, in Q2 '23. Similarly, the net loss for the first six months of 2024 was reduced to $2.2 million, or $1.33 per share, compared to $4.3 million, or $7.74 per share, for the first six months of 2023, including a hardware reserve of $1.5 million through June 2023. We will continue to focus on increasing revenue and controlling costs for the remainder of 2024 in support of our path to cash flow breakeven and profitability. In terms of our balance sheet and cash, as of June 30, 2024, BIO-Key had current assets of approximately $3 million, including $1.3 million of cash and cash equivalents, $932,000 of accounts receivable, and $433,000 of inventory net of reserves. Recall that in 2023 we had written down over $3 million in inventory slated for a project in Africa to zero. We are expecting to convert some of the hardware to inventories to cash shipments in the current quarter to support our growth initiatives and our operations. We also have several large projects with new and existing customers that are in request for proposal and proof of concept stages with financial and public sector companies and a foreign defense force that's an existing company, which could potentially benefit our results in the second half of 2024. In addition to existing partnerships and relationships, as Mike discussed. That concludes our prepared remarks, and I'll ask the operator now to prepare for Q&A.

Operator, Operator

Thank you. And today's first question comes from Jack Vander Aarde from Maxim Group. Please go ahead.

Jack Vander Aarde, Analyst

I appreciate the update and thank you for addressing my questions. Mike, I need to ask about the license revenue, specifically regarding the revenue results from this year and the first half of the year. License revenue has decreased year-over-year, even if the $450,000 order had not been delayed. In the first half, total revenue appears to have decreased year-over-year compared to the same period last year. You've mentioned an increase in growth in your recurring revenue base and an expansion of channel partner programs. Could you help us understand why the reported revenue hasn't shown significant improvement in that case and what needs to happen for meaningful revenue growth to begin in the future? Thank you.

Mike DePasquale, CEO

Good morning, Jack, and thank you. Clearly, the answer to that question is pretty simple. It's really about closing more of the opportunities that we have in our pipeline. And as I mentioned in my prepared remarks, the average sale value that we're pursuing directly now and through most of our partners in our partner network is a larger sale, and it's with a higher-profile customer. The timing on those deals is significantly different than the smaller ones that I mentioned, like the City of Williamsburg or some of the installed base customers that we have where we have them captive. So I think what we're going to see is significant revenue growth in periods that may not necessarily be repeatable every period. I mentioned that our variability will continue. We're pursuing, and have been pursuing a number of very, very large opportunities with notable companies that are considering our solutions for all the reasons I described. Our Passkey:YOU solution, in and of itself, is creating significant interest because there's no infrastructure interruption. It's a very simple overlay independent of the infrastructure that you have in place or the vendors that you have in place, perhaps securing your higher-level in Identity and Access Management or securing your data and your IT infrastructure. So a simple answer to that question is we just need to increase the number of opportunities, shorten the sales cycles, and get our close ratio up. That's really what we're solely focused on now. We recognize that as much as we have been pushing to sell through partner networks and our partner infrastructure, which has been built significantly over the last two years, we need to have more control over some of those larger deals. We're also focused on direct selling, which again gives us more control. We've brought a couple of new resources on board just over the last six months this year who are enterprise-focused and very experienced in the security space, and they're making really nice headway in some of these larger deals. So I think what you're going to see in the future periods is these deals are going to begin to drop, and that's going to help us. The other opportunity which we introduced and announced today with the Amazon marketplace is also significant for the smaller and medium-sized customers that we're pursuing. Amazon has about 300,000 customers globally that utilize the platform, which can now take advantage of our solutions without, first of all, they can try them, they can investigate them, and they can basically sign up for evaluations and then purchase them right through the marketplace, and the install is a simple slide to get BIO-Key solutions up, authenticating, in essence, their front doors. So that's a really powerful opportunity for us, and we have high expectations about what that means. The other benefit of getting into that program, and it took us a considerable period of time, is that there is joint marketing support, and joint marketing relationships that all come with that relationship. So we're going to be doing joint marketing, we're going to be doing joint events, and you're going to see all of that unfold as we get to the end of this quarter and the beginning of next. In fact, we've got meetings set up with all of their resources to train them and get them up to speed on everything that we do, and that's going to have a significant impact. So Jack, that's what we need to do, that's what we're working on, and I believe that's going to have a real impact on our business as we get to the end of the year and also into next year.

Jack Vander Aarde, Analyst

I appreciate the information provided. Regarding the Amazon marketplace announcement today, can you clarify if this is connected to your announcement from the fall of 2023 about being accepted into Amazon's AWS independent software vendor program? I would like to understand the details further.

Mike DePasquale, CEO

Well, it is a continuation. So first, we were accepted as a vendor, and then second, you have to develop your storefront, in essence, to be in the marketplace. You have to be approved and meet all of the hurdles, and that's taken us a considerable period of time. So now this is the extension of that announcement about six or eight months ago. So now we are fully live on their marketplace, allowing, as I just described, their customers to acquire our solutions very easily.

Jack Vander Aarde, Analyst

Okay, got it. Is it fair to assume you expect revenue from this Amazon channel this year to start?

Mike DePasquale, CEO

Absolutely. There's no question we had to go live first, and we're live now and you can click on the link and see what it's all about. Next steps are the integrated training of all of their resources, and then the marketing and promotion begins at the end of this quarter and into October. There'll be joint events and joint webinar sessions. We'll actually be going to conferences that are funded partially by AWS, so they really get behind the company if they believe the technology can benefit all of their customers, but more importantly, create greater revenue levels for them.

Jack Vander Aarde, Analyst

Okay, great. And then can you help me understand from your prepared remarks, and it's quoted in the press release just kind of regarding your outlook commentary. If I quote, "you remain confident in your ability to drive sequential growth on a full-year basis." Just trying to understand what that means? Does that mean you expect third-quarter revenue to be above this second quarter and fourth-quarter revenue to be above the third quarter? Or are you talking about you expect full year '24 revenue to be above '23?

Mike DePasquale, CEO

All of the above. We're still confident we're going to grow our business year-over-year, and obviously, this was a terrible quarter from a revenue perspective for us. Right. It's one of the lowest quarters we've had and I guess we can go back and find out, but it's got to be at least almost two years. Our expectation is much higher for the second half of the year, and obviously, again, that will lead to a year-over-year increase in revenues. That's our goal and objective and expectation.

Jack Vander Aarde, Analyst

Okay, got it. That's helpful to know. And then I know the third quarter is seasonally slower for you, but it sounds like that larger order, that $450,000 order from your European, I'm taking that as swivel secure, will land then would that be recognized in the third quarter entirely?

Mike DePasquale, CEO

Yes, anything that obviously closes in the third quarter will be recognized in the third quarter, and as Cecilia said, we've had a number of orders left. So yes, our expectation is that the third quarter will be a good quarter.

Jack Vander Aarde, Analyst

Okay, great. I have a couple more questions for clarification. I’d like to follow up on the two large contracts in Africa. I know there have been delays over the years, and you may have written down the projects, but is there still potential for them? There are a lot of political issues happening there, so I’m wondering if these contracts are now canceled or if there is still an opportunity available. I'm looking for some clarity on that.

Mike DePasquale, CEO

Yes, I mean there's still an opportunity there, but there have been significant delays in everything they've done underneath their national identity management Commission. Kind of registering all of, in particular in Nigeria, right? Registering all of their citizens, getting them in the database, everything has been just fundamentally delayed with changes in administration, finances, and as you know, their economy is so dependent on oil, and there's been a lot of ups and downs over the last two years. But the projects are still alive, and we still have aspirations of selling some of our equipment in that market. We also have another project we've been working on in the payment space that is ongoing. It's under development, but it's more commercially oriented, so not relying on the government but really relying more on the banking and finance infrastructure within the country. So that's another opportunity that we've been working for quite some time. We're optimistic about that. As you know, we do really well in South Africa, and we have done well in the financial services space there, and we're creating some new partnerships in other African countries that we're optimistic can lead to greater levels of business. We've really downsized our focus and our operation there, given that we've already spent so much money. We again spent money on that hardware, which we’ve written down, and we expect to sell that inventory which is as fresh as it was when we bought it. The good news is there's no later generation of products, so we're feeling pretty good about that. But yes, we spent a lot of money against an expectation that these projects would move forward, but unfortunately, it's a market that just is very unpredictable.

Jack Vander Aarde, Analyst

Understood. Understood. I appreciate the color there. And just maybe one last question, because it is a key part of your existing business, I believe, to go forward growth strategy is the Channel Alliance Program, the CAP program. How does, maybe just help me understand how that has specifically contributed to the business. Have you added more channel partners and how does that channel CAP program compare to the opportunity with Amazon's program from a sales perspective? And just so I have some idea of how the two compare? Thanks.

Mike DePasquale, CEO

Great. Great question, actually a really good question. So let me take the first part, which is our CAP program. The CAP program is evolving, and we signed up a lot of partners. That's the first thing you want to do, you want to get a lot of attention, and you want to get partners in the program and get them to learn about the product and represent it. At the end of the day, we're in kind of the second phase or second generation of our program, where we're beginning to focus on a select group of partners that are making a more serious investment and are actually bringing opportunities to us or that we're bringing opportunities to them for fulfillment so that they will again trust us and generate more opportunities on their own. We're in the second generation of that program right now, working with a select group of larger partners that really have made a commitment to us and want to do deals, and you'll see better productivity. In Europe, almost every single thing we sell in the EMEA region comes through a partner. In fact, everything goes through a partner, but they've evolved their model to the point where, again, through a select group of partners, they drive most of their business. So we're moving in that direction. The second part of your question was how does that relate to the AWS marketplace? Well, it's entirely different. Remember, with AWS, the 300,000 customers on their platform can look sideways and seek solutions on their own, or they might have a partner or someone responsible for security or security infrastructure within their environment, but it's running on the AWS platform. That partner might recommend to that AWS Client that, ‘Hey, BIO-Key's got a really good solution.’ So there’s a potential for us to have kind of a bifurcated sale where the partner works with an AWS customer, and they recommend a BIO-Key solution, but that sale goes through the marketplace. I think we'll see how that evolves over the next quarter to two quarters, but they certainly don't compete, but they could be more collaborative.

Jack Vander Aarde, Analyst

Got it. Okay, that's really helpful color, too, and I think that's it for me. I appreciate the update, Mike, and good luck moving forward and look forward to watching you guys execute.

Mike DePasquale, CEO

Great. Thank you, Jack.

Operator, Operator

Thank you. At this time, we are showing no further questions, and the Q&A session has ended. I'll ask Mike DePasquale for any closing remarks.

Mike DePasquale, CEO

Thank you, everyone, for joining our call today. We look forward to updating you on future investor calls. Please reach out to our IR team whose contact information is listed in today's press release with any follow-up questions. We look forward to updating you on our Q3 call, and as always, we'll provide news and updates in the interim by press release. Again, thank you for your time today, and have a great day.

Operator, Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.