Earnings Call Transcript - BKYI Q1 2025

Operator, Operator

Good morning, everyone. Thank you for standing by, and welcome to BIO-key International's First Quarter 2025 Conference Call. During the prepared remarks, all participants will be in listen-only mode. As a reminder, this conference is being recorded today, Friday, May 16, 2025. I will now turn the call over to Bill Jones, Investor Relations. You may proceed, sir.

William Jones, Investor Relations

Thank you, Rocco. Hosting today are BIO-key's Chairman and CEO, Mike DePasquale, and CFO, Ceci Welch. As a reminder, today's conference call and webcast and answers to investor questions include forward-looking statements which are subject to risks and uncertainties that may cause actual results to differ materially from current expectations. Words including, anticipate, believe, estimate, expect, plan and project or similar words generally identify and express such forward-looking statements. These forward-looking statements are made based on beliefs, assumptions, and information currently available to management today pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For a more complete description of the risks and uncertainties that affect future performance of BIO-key, please see risk factors in the Company's annual report as filed on Form 10-K with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. The company undertakes no obligation to revise or disclose revisions to forward-looking statements to reflect circumstances or events that may occur after today's conference call. Now I will turn the call over to Mike to begin. Mike?

Michael DePasquale, CEO

Thanks, Bill, and thank you all for joining today's call. After my remarks, I'll turn the call over to Ceci for a financial overview, and then we will open the call for investor questions. Our Q1 '25 revenue rose 10% to $1.6 million versus Q4 '24, as we continue our transition to selling high-margin BIO-key branded products in the EMEA region. Our year-over-year revenue comparison, however, was impacted by $1.2 million in revenue in Q1 last year for a two-year follow-on contract with a financial services customer. Importantly, the same customer has upgraded their engagement to include our more advanced one-to-many biometric authentication solution, resulting in Q1 '25 revenue of $690,000, but accounting for much of our year-over-year revenue decrease. This enhanced fingerprint-only biometric ID system requires no card or account number for client identification, just a fingerprint scan. The solution will shave 30 seconds from each client interaction, providing increased security and an improved customer experience, while also delivering substantial long-term personnel savings for our customer. This is a very compelling use case that should offer BIO-key significant new revenue opportunities across a whole new plethora of opportunities, again in the same industries and others as well. Importantly, based on the customer's expanded deployment of our identity-bound biometric technology, we expect revenue from this customer to more than double to approximately $3 million for the next two-year license period starting in Q1 '26, up from the $1.2 million in Q1 '24. That is very, very positive and represents nearly half of what our total revenue number was last year. Our gross profit remained healthy in Q1 at 83%, due to our high-margin Software-as-a-Service model, and we were able to reduce our SG&A expense by 23% year-over-year. Our cash position increased substantially in Q1 '25 to over $3 million, reflecting proceeds from warrant exercises early in the quarter. We also reduced our note payable by more than half from year-end 2024 to a balance of approximately $762,000 on the original $2.3 million note. These balance sheet improvements provide solid support for the company, as we pursue new growth opportunities. We're seeing solid traction for our identity-bound biometric solutions in key verticals such as defense and financial services, both of which require the highest levels of security and privacy. These customers are drawn by our unique ability to authenticate the individuals seeking data or network access rather than alternate solutions that rely on factors far more prone to being compromised. We now support secure biometric authentication from multiple foreign, national and international defense and police organizations who trust BIO-key solutions, and we are working to build on these powerful endorsements in our business development efforts. During the first quarter, the National Bank of Egypt began integrating BIO-key's industry-leading PortalGuard IAM platform. The project was led by our partner, Raya Information Technology, leveraging PortalGuard's advanced IAM, MFA and SSO capabilities to secure the digital identities of the bank's 30,000 employees. Down the road, we believe there is significant upside potential for this solution to be rolled out to the bank's end users as the bank gains more experience with our solution, and we work to progress that relationship. We are also working to build our base in the government sector, which includes federal agencies as well as State, Local and Education or SLED markets. Domestically, we serve over 100 educational institutions with over 4 million end users. These customers value BIO-key security, ease of use and flexibility, including our support for 17 different authentication factors, which together provide a compelling solution with an attractive return on investment. Given increasing demand on the use of cell phones in schools, there is a growing interest in our passwordless, phoneless and tokenless authentication solutions to meet pressing security and usability challenges. In Q1 '25, the Wyoming Department of Education deployed PortalGuard IDaaS to support up to 20,000 end users. Additionally, many of our existing college and university customers are migrating from our on-prem solution to PortalGuard IDaaS, further expanding our base of recurring revenue. Also during Q1, we executed a strategic partnership and joint purchase agreement with California's EdTech Joint Powers Authority, enabling PortalGuard to become an approved solution for 195 K-12 schools and school districts that serve over 2.6 million students in California. Member schools are able to access the JPA website to easily purchase and deploy approved solutions. We believe BIO-key is uniquely positioned to comply with the California phone-free schools regulations, which limit or prohibit smartphone use in schools by July of 2026, whereas most competing solutions rely on phone authenticators or hardware security keys, neither of which are practical in schools. So this could be a significant opportunity for us. From a strategic standpoint, we are particularly encouraged about the growth opportunities in the EMEA regions of Europe, the Middle East and Africa, where we have been seeing improving traction and a particular interest in our differentiated identity-bound biometrics capabilities. We have refocused our efforts on BIO-key-branded solutions in those markets following our transition away from Swivel Secure licensed solutions and services beginning in the latter half of 2024. While this transition has resulted in some challenging year-over-year revenue comparisons, it has focused our sales and marketing efforts while providing us greater control and much stronger margin profiles. We expect our expanding EMEA group to return to growth with enhanced margins as we progress through 2025. For many years, we have been highlighting the growing IT security risks and demonstrated vulnerabilities of many widely deployed IAM solutions. And yet we have been amazed by the limited forward movement by enterprises to address these risks. The good news is that we are finally starting to see governments and enterprises taking action to protect their data and networks with more powerful, more robust IAM solutions like our identity-bound biometrics. From our vantage point, C-suites and boards around the world are increasingly recognizing the limitations of legacy authentication methods relying on passwords, pins, tokens, cards or mobile devices as well as the risks, vulnerabilities and the cost of inaction. We are seeing this in our discussions with customers, prospects and our channel alliance partners and more importantly, in customer action, including some of the world's most sophisticated defense agencies that we are serving. BIO-key offers a powerful suite of IAM solutions that meet these challenges and we expect the move to passwordless, phoneless and tokenless authentication solutions will offer continued opportunity for us to grow and gain traction in 2025 and beyond. Given this backdrop, our improved balance sheet and our expanding base of recurring IDaaS revenue, we feel BIO-key is well-positioned to achieve improved top and bottom line results. Given our size and variable timing of large customer orders and renewals, we expect our financial performance to fluctuate quarter-to-quarter as it has been, but supported by this growing base of recurring revenue, which is over $6 million right now, we think we are going to become more stable. Now I will hand the call over to our CFO, Ceci Welch, to review our financial position, and then we'll open the call to questions. Ceci?

Cecilia Welch, CFO

Thank you, Mike. Our results were released after the market closed yesterday, along with the filing of our 10-Q. Now let me review some of the operating highlights. As mentioned, we exited the EMEA Swivel Secure services agreement, as the royalty structure and fees created a low-margin business, and we reallocated resources towards the BIO-key branded business. While this termination has created some revenue challenges in the latter half of 2024 and Q1 2025, it will strengthen our business in the long run by allowing us to focus on BIO-key solutions with superior capabilities and better margins. As Mike discussed, our Q1 revenue comparison was impacted by a year-over-year decrease of approximately $0.5 million from a financial services customer. This decrease was due to the timing of revenue recognition from a customer that is actually expanding their deployment of BIO-key technology. Given that impact and the transition to BIO-key solutions, our Q1 2025 revenue in the EMEA territories decreased to $1.6 million compared to $2.2 million in Q1 2024. Q1 2025 service revenues increased to around $273,000 from $213,000 in Q1 2024. Recurring support service revenue grew by 37% to $265,000 due to additional support services from a large customer agreement. Non-recurring service revenue decreased by $12,000 due to the related wind down of a Swivel Secure customer. Hardware revenue rose to $236,000 in Q1 2025 from $18,000 in Q1 2024, mainly from increased purchases of fingerprint biometric scanners to support the expanded deployment of our identity-bound biometric solutions. Gross margin fell to $1.3 million in Q1 2025 from $1.9 million in Q1 2024, primarily due to a decrease in total revenue and a modest decline in gross margin to 82.6% in Q1 2025, compared to 86.3% in Q1 2024, reflecting an increase in lower-margin hardware as a percentage of revenue in the respective periods. BIO-key reduced operating expenses by approximately 18% or $422,000 to $2 million in Q1 2025, mainly due to a 23% reduction in SG&A expenses of $410,000, which reflects lower administrative expenses, sales personnel costs, and professional service fees. Reflecting lower revenues, partially offset by reduced operating costs, BIO-key's net loss for Q1 2025 increased to approximately $737,000 or $0.16 per share, compared to a loss of $573,000 or $0.32 per share in the same period last year. The per share figures are based on 4.7 million weighted average shares outstanding in Q1 2025, compared to 1.6 million in Q1 2024, primarily due to the increase in shares from the warrant exercise in Q1 2025. In January 2025, the exercise of warrants priced at $1.85 per share generated gross proceeds of approximately $3.8 million before agent fees and offering expenses. As of March 31, 2025, BIO-key has current assets of $4.6 million, including $3.1 million in cash, up from current assets of $1.9 million, which included $4 million in cash. This concludes my prepared remarks. Operator, please prepare for the Q&A session.

Operator, Operator

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

Jack Vander Aarde, Analyst

Okay. Good morning. Great. I appreciate the update, guys. So Mike, that large customer that you referenced contributed $690,000 in the first quarter of this year. Last year, I guess, it was $1.2 million in the first quarter of 2024. And you mentioned the upgrade, I believe, and you also expect them to renew, I guess, at a larger contract of $3 million over a two-year period. I think you said as of 1Q '26? So a couple of things. Is that correct? 1Q '26? And then do you expect any other revenue this year from that customer? And is this your single largest customer?

Michael DePasquale, CEO

That's a good question. Great. Great. So thanks, Jack, and good morning. So yes, it is now our single largest customer. So we'll get that out of the way. They've upgraded to our latest technology, which has fundamentally doubled the ARR. So on an annual basis, they went from about $600,000 to $700,000 to approximately $1.4 million, $1.5 million. And so we've been working with this customer for many, many years. This upgrade, which is what they paid for in the first quarter, right on an annual basis, about $700,000 in Q1, will now represent in Q1 of '26, right? So fundamentally, nine months from now, give or take, about a $3 million renewal. And if they do a two-year, that will be $3 million, they'll pay upfront. If they do an annual contract, it may be a little bit more, and it will be paid annually, but it will be at least $1.5 million in ARR and revenue and cash to BIO-key. And obviously, it's all margin; it's all software. So very, very positive.

Jack Vander Aarde, Analyst

Okay. Great. And then maybe just to follow up on the Q1 '25 revenue. So just trying to get a sense of the rest of the attribution there. So outside of $690,000, that leaves about another $900,000 of revenue you generated in the quarter. So what was the bulk of this? Was it Wyoming Department of Education? Was it National Bank of Egypt? Was it kind of half and half there? Or was there a bunch of other fragmented or little revenues as well? Just help me understand the rest of the revenue.

Michael DePasquale, CEO

Yes, it is a mix. We generated revenue from service and maintenance, new customers such as Wyoming and the National Bank of Egypt, and upgrades to our existing clients. As I mentioned earlier, we are transitioning customers from on-premise solutions to our IDaaS, which is an upsell that increases our revenue and often leads to multiyear contracts. Overall, it was a combination of various sources.

Jack Vander Aarde, Analyst

Okay, great. Can you discuss whether the Wyoming Department of Education and the National Bank of Egypt will contribute to Q2 revenue or if these were events from Q1?

Michael DePasquale, CEO

They were events that took place in the first quarter. In Egypt, there may still be ongoing opportunities for upgrades and enhancements. However, Wyoming has signed a multiyear agreement, and the revenue from that opportunity was recognized in the first quarter. There is some deferred revenue that we set aside from contracts for support, but essentially, this was a first quarter event.

Jack Vander Aarde, Analyst

Okay. Great. And then I haven't really heard of explicitly mentioned. And maybe I apologize if I missed this, but can you maybe just touch on Passkey:YOU again, that solution you announced originally back in June of 2024. What's the latest of Passkey:YOU?

Michael DePasquale, CEO

Passkeys are becoming widely adopted. The distinctive advantage of our Passkey solution is that a biometric can serve as a Passkey and function as a FIDO authenticator. This sets us apart from standard Passkeys used on phones or computers. Our solution can be marketed to virtually any customer, regardless of their existing security infrastructure, whether they are using systems from SailPoint, ForgeRock, Okta, Ping, or Duo. We can implement our Passkey solution in areas of their enterprise or government agency where mobile phones or hardware tokens cannot be utilized, such as on manufacturing floors or in call centers, where the use of cell phones is restricted. We are seeing growing interest and traction for this solution, and we believe it represents a significant opportunity for us moving forward. It's remarkable to observe that after 20 years in this field, the core technology we've developed is now recognized as one of the most secure and convenient options for enterprises and government agencies. They understand that using mobile phones for key provisioning and lacking control over networks creates significant security risks, presenting a major opportunity for us. Additionally, in EMEA, countries are being prompted to enhance their defense and security measures, leading to substantial budget allocations. For instance, Germany plans to spend $1 trillion over the next decade on defense enhancements. Recently, our Managing Director attended a conference in Spain, where it was announced that their defense budgets will be doubled in the near future. This represents a tremendous opportunity, and we have established a solid foundation with defense-related security agencies that we can build upon. Our strong team and partner network in Europe position us well to exploit these opportunities.

Jack Vander Aarde, Analyst

That's really interesting, Mike. I could probably ask many more questions on that topic. But maybe I'll ask how you view the opportunities in various regions, particularly as different governments increase their defense budgets. How do you see the potential of these opportunities compared to the largest customer we discussed who is renewing a three-year contract or a $3 million contract due in the first quarter of 2026, or the Bank of Egypt? Do you think these could be significant game changers in terms of revenue? And do you have any insight into how attainable these opportunities are and how quickly you might be able to tap into them?

Michael DePasquale, CEO

Yes. First of all, you'll hear more about that from us as we are able to discuss further. One of the biggest challenges in this area is the secrecy involved. Talking about these matters is very difficult, and the agencies are usually not inclined to disclose information. However, we have been working with a defense ministry that has engaged us for millions over the past few years, and we expect that to continue in the next year or two. The deals, especially in smaller countries, can start around $0.5 million or more. These typically generate recurring revenue and primarily involve our biometric technology, which opens the door not only for recurring software sales but also hardware sales. Our blended gross margins are at 82% this quarter, which includes hardware. These are significant opportunities that could be game changers and may dramatically alter the company's profile. Given our heavy investment in technology development, achieving some scale could lead us to profitability very quickly. I believe these types of opportunities could help us reach our goals this year.

Jack Vander Aarde, Analyst

I appreciate that. Fantastic. As we are halfway through the second quarter, I have a couple of questions about the outlook. Are there any large renewals or repeat purchase orders, similar to what you had with the large defense industry customer, coming up in the second quarter or for the rest of this year that are significant? Additionally, do you have any general comments about the seasonality of the second quarter or how it compares to last year, or what your expectations are? Thanks.

Michael DePasquale, CEO

We have not provided guidance, but I can say that we are going to grow. Our goal is to sequentially grow our business. We now have a solid model, a strong base of customers, and a robust pipeline of opportunities, though we need to close them. There are some very large deals along with many smaller ones. We believe we are in a better position than ever to achieve continuous sequential growth. Typically, our third quarter may present challenges due to the slow month of August in Europe, but aside from that, our aim is to grow sequentially this year and reach profitability.

Jack Vander Aarde, Analyst

Okay, great. It seems that you anticipate sequential growth for the rest of the year. So Q2, Q3, and Q4 are expected to gradually increase each quarter? There might be some fluctuations, but that seems like a reasonable way to consider it.

Michael DePasquale, CEO

Absolutely. That's our goal and objective. And again, I put the caveat in for the seasonality in Europe, right, just in the third quarter. But short of that, I think that's a fair statement, and it is a fair perspective on our objectives and plans for this year.

Jack Vander Aarde, Analyst

Okay, great. If I could squeeze in one more question, Michael, this has been very helpful. You did an excellent job managing operating expenses, which decreased significantly, yet you still achieved sequential growth. The gross margins remained strong, especially in hardware, which is encouraging. How confident are you about your margins and your outlook for operating expense control? Is Q1 a reliable baseline for what to expect moving forward in terms of sequential growth?

Michael DePasquale, CEO

On the gross margin side, we are aiming for the 80% range or higher. Achieving that may depend on the acquisition of significant software annual recurring revenue contracts, which could push our margins a bit higher. Regarding expenses, I believe Q1 is a solid indicator of our future performance. We are closely managing our expenses, investing where we expect to see returns, whether short-term or medium-term. Ceci?

Cecilia Welch, CFO

Yes, Mike. And I agree that's relatively a good rate. We have a couple of shows planned and that bumps it up a little bit. We also have a good commission plan in place. So that will rise with the tide. And then again, we have our annual meeting, which also bumps up some of our costs. But we've been really trying to range things in new services versus hiring. So we've been, I think, really focused on that and it has paid off.

Jack Vander Aarde, Analyst

Great. Just quickly following up on that, do you think the second quarter will experience some one-off or seasonal events that could lead to an increase, or do you expect that increase to occur in the third quarter?

Cecilia Welch, CFO

In the second quarter, we have one show planned. It won't result in a significant increase. Our meeting is typically scheduled for the third quarter. That's the current plan. I'm not anticipating a large increase, like $200,000 or anything similar. We'll have expenses for a booth and some travel, so while it won't be a major boost, there will be some increase.

Jack Vander Aarde, Analyst

Got it. Okay, very helpful. Thank you, Ceci, thank you, Michael, I appreciate the time.

Michael DePasquale, CEO

Thanks, Jack.

Operator, Operator

And our next question today comes from Dan Khamis, a private investor. Please go ahead.