Aware Inc

NASDAQ:AWRE

Earnings Call Transcript 2024-Q1

[Matt Glover]

Good afternoon, and welcome to Aware's First Quarter 2024 Conference Call. Joining us today are the company's CEO and President Robert Eckel, Principal Financial Officer David Traverse, and Chief Revenue Officer Craig Herman. Following their remarks, we'll open the call to questions. [Operator Instructions]

Before we begin today's call, I'd 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 by such statements. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K, 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 because of new information, future events or otherwise, except as required by applicable securities laws.

Additionally, this call contains certain non-GAAP financial measures, as the term is defined by the SEC and Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, Aware has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure 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 link available in the Investor Relations section of the company's website. Now I'd like to turn the call over to Aware's CEO and President Bob Eckel. Bob?

[Robert Eckel, executive]

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we reported our results for the first quarter ended March 31, 2024. A copy of the press release is available in the Investor Relations section of our website. Before diving into our financial and operational highlights for the first quarter of 2024, I'd like to provide a brief overview of Aware and what sets us apart in the biometric industry. Aware is a global biometric identity platform company, leveraging advanced data science, machine learning and artificial intelligence to tackle complex business and identity challenges. Our mission is to enhance trust in an increasingly connected world by delivering innovative biometric technologies that strike the best balance between security and user experience.

Ultimately, at a high level, we help organizations improve business results through biometrics. For over 3 decades, Aware has been at the forefront of biometrics industry, earning the trust of governments and commercial entities worldwide. Our expertise in digital onboarding, authentication and life cycle management of biometric identities, coupled with our secure multimodal adaptive biometrics has solidified our position as a trusted partner. We take pride in our proven track record and comprehensive portfolio, which has enabled us to forge strong partnerships with core government agencies globally, including in the U.S., United Kingdom, Canada, Australia and Germany.

Aware is widely recognized as a global leader in biometric data orchestration for border management and immigration. Our cutting-edge solutions enable seamless integration of biometric technologies into existing systems and infrastructures, streamlining processes and enhancing security at critical entry and exit points. By leveraging our expertise in data management, identity verification and risk assessment, we empower governments to effectively manage their borders while facilitating legitimate travel and trade.

Our industry-leading solutions are trusted by some of the largest banks in the world for their onboarding and authentication needs. We take pride in being at the forefront of responsible technological development by harnessing AI and machine learning, we have created biometric software offerings that ensure demographic neutrality in equity, underscoring our steadfast commitment to fair and impartial treatment of all individuals.

Our rigorous research, design, development, testing and refinement processes leverages some of the largest and most diverse datasets in the world to trainer algorithms. This meticulous approach is secured as the #1 position in minimizing and practically eliminating bias based on age, gender or race as independently tested and verified by NIST.

We prioritize consent-based biometric technology, ensuring individuals only use our solutions if they expressly consented except in specific forensic law enforcement, defense and intelligence applications. Our agnostic approach provides customers with the flexibility to build upon existing investments rather than resorting to costly replacements, a prevalent industry practice often resulting in unnecessary waste.

Our trusted status is further solidified by a comprehensive portfolio that addresses threats, and upholds identity integrity in a future-proof manner. Aware does not outsource any biometric technology, serving as the sole provider for all our customers. This enables us to swiftly address emerging attack vectors without relying on third parties for upgrades or recertifications. Aware leads the industry in liveness detection as demonstrated by our top ranking in the independent NIST benchmarking study. We have achieved the #1 spot in security for both impersonation and evasion detection for one of the presentation attack types, the only provider to do so.

Furthermore, Aware ranks top 5 in security and top 10 and convenience across most presentation attack types for evasion, making us the only provider who has successfully struck the balance between user experience and security with the ability to configure solutions appropriately for every use case. Finally, our platform and offerings are engineered to [ effortlessly ] scale with customers, adapt to changing environmental factors, risk profiles and consumer demands as well as proactively tackle future challenges. This allows us to uphold the level of customer satisfaction required to retain and grow the recurring revenue base we have diligently cultivated.

Now that you have a clear picture of Aware and our offerings, let's dive into our operational and financial results for the first quarter of 2024. After a record-breaking 2023, our Q1 results underscore our continued focus on optimizing our core structure, leveraging our partner ecosystem and enhancing our go-to-market strategy to drive recurring revenue growth. Building upon our strategic cost optimization initiatives implemented throughout 2023 and in Q1 of 2024, we have significantly streamlined our cost structure and reduced our revenue breakeven point.

In Q1, we drove an 8% or $0.6 million year-over-year decrease in operating loss. We anticipate continued improvement compared to our quarterly operating expense run rate in 2023, as demonstrated in the first quarter of 2024.

Our commitment to enhancing our operational structure and customer success initiatives is producing sustained improvements reflected in our Q1 performance. We continue expanding our recurring revenue customer base, resulting in a 3% year-over-year increase in both total revenue and recurring revenue. A large driver of this revenue was the 18% increase in subscription maintenance revenue related to contracts secured in Q3 of 2023 as well as our sustained momentum within the government space.

Craig and his team have built a solid foundation for future scalability by securing strategic partners and valuable clients. I'll let him provide more details on their success this quarter, but I'd like to highlight a few key customer wins. During Q1, we successfully onboarded several new customers in Latin America, like Imply and OpenPass as well as expanding our use cases with existing customers such as a major federal government agency and a leading Turkish bank.

We expect these awards to meaningfully contribute to the ongoing expansion of our recurring revenue base. As mentioned in prior quarterly updates, we do not plan to announce every contract we've secured or currently working on. However, it's important to note that Aware's advanced technology and strong partnerships are consistently generating new and exciting opportunities in competitive markets. While there may be some quarter-to-quarter fluctuations, we maintain a healthy pipeline with promising opportunities in our backlog.

Furthermore, we've cultivated a solid foundation of recurring revenue that acts as a stabilizer, helping to mitigate the impact of these fluctuations and laying a strong foundation for future growth. Before discussing our initiatives for 2024, I'll turn the call over to David to take us through our financial results for the first quarter. David, over to you.

[David Traverse, executive]

Thank you, Bob, and good afternoon, everyone. Turning to our financial results for the first quarter ended March 31, 2024. Total revenue for the first quarter was $4.4 million compared to $4.3 million in the same year ago period. The 3% year-over-year increase was largely due to higher software maintenance revenue related to contracts awarded in Q3 of 2023.

Recurring revenue for Q1 2024 was $3.2 million or 71% of total revenue and a 3% increase from the prior year quarter. Looking at our operating expenses. Our first quarter 2024 operating expenses were $5.7 million, an 8% year-over-year decrease compared to $6.2 million in Q1 of last year.

Operating loss for the first quarter of 2024 improved approximately 32% year-over-year to $1.3 million compared to an operating loss of $1.9 million in the same year ago period. For the first quarter of 2024, GAAP net loss totaled $1 million or $0.05 per diluted share, a 30% improvement with a GAAP net loss of $1.6 million or $0.07 per diluted share in Q1 of last year. Our adjusted EBITDA loss for the quarter, which we reconciled the GAAP net income in our earnings [ release ] totaled $1 million, which compares to a loss of $1.4 million in the same year ago period.

The year-over-year improvement in net loss and adjusted EBITDA was primarily due to continued lower operating expenses. Looking at our balance sheet. Cash, cash equivalents and marketable securities totaled $28.5 million as of March 31, 2024. This compares to $30.9 million as of December 31, 2023. The decrease is in line with our expectations and is primarily due to our operating loss as well as timing of collections of accounts receivable at year-end and in addition to traditional payments made in the first quarter.

As we move through 2024, we're backed by a strong balance sheet and cash position, offering us the flexibility to evaluate any high ROI opportunities that have the potential to accelerate our growth roadmap. Our robust financial standing provides us with the resources necessary to explore strategic initiatives and make prudent investments to drive further innovation and market expansion. We remain committed to carefully evaluate any opportunities that align with our long-term vision. Rest assured, we will approach any such opportunities with the same rigor and diligence that have enabled us to reach this point.

Our focus remains steadfast on driving profitability, expanding our recurring revenue base and delivering exceptional value to our shareholders over the long term. This completes my financial summary. I'd like to now turn the call over to Craig to discuss the progress we've made on our go-to-market strategy. Craig?

[Craig Herman, executive]

Thanks, David. During the first quarter, we remain steadfast in our commitment to scale through strategic partnerships, expand and retain our core customer base and business segments and fortify the product market fit of Aware [ ID ]. These coordinated efforts led to gradual improvements in our quarterly performance and laid the foundation for continued growth and success going forward. As Bob mentioned, we achieved several notable customer successes this quarter.

One of the more significant wins was the expansion of our relationship with a major U.S. federal government agency. We were able to increase this large 3-letter agency's use cases to include enrolling biometric and biographic data of their employees and contractors. Aware's technology is utilized across dozens of agencies within all 3 branches of the U.S. federal government. And these contract expansions underscore the security and user friendliness of our products. In addition to growing our domestic footprint, we also continue making progress in our global expansion.

In Q1, we renewed and expanded a significant multiyear contract with one of the largest international police organizations in Europe. This contract is part of our growing portfolio in border management and immigration, which is a rapidly accelerating market with promising opportunities for Aware. We also onboarded several new customers in Latin America, such as Imply and OpenPass.

Imply is a leading provider of ticketing, access control, cashless solutions, ATMs and LEDs in Brazil, while OpenPass is a prominent online financial platform in Argentina. We are excited to get these contracts live and anticipate they will contribute to recurring revenue in the future. The final customer win I'd like to highlight is our successful go live with another leading bank in Turkey, which was signed in Q4 2023. The swift turnaround from securing the contract to getting the customer live is a testament to the excellence of our customer success team and the out-of-the-box readiness of our enhanced products.

Furthermore, this quarter, we showcased Aware's cutting-edge technology at several industry events, including Training magazine's Training 2024 Conference & Expo, Channel Partners Conference & Expo and the more recent ISC West in April. The reception of our products at these trade shows has been fantastic, and we are seeing tremendous excitement for our biometric solutions among a multitude of potential leads.

Our partner program remains instrumental in expanding and securing our recurring revenue base. Since its inception, we have continuously worked to enhance all aspects of this ecosystem to maximize its ROI. This past quarter, we optimized marketing expenses and strategy within our formal partner program by expanding their access to and improving the ease of use for co-branded marketing materials. Additionally, as mentioned on our last call, in Q4, we rolled out a dedicated partner portal where partners can access enablement and co-marketing materials to increase their knowledge and selling power of Aware solutions.

We are continuing to build on this with focused ongoing product and sales enablement. We also officially launched our marketing development fund program in Q1 for partners that qualify. This will help us invest more deeply with those partners who are looking to aggressively expand our footprint in their markets, ensuring our partners have ample resources to succeed is at the forefront of our go-to-market strategy. And this commitment is translating into increasing momentum across the globe that we can leverage to drive future ARR. Looking ahead, -- our team's initiatives remain focused on accelerating the product market fit for Aware ID, generating incremental subscription-based revenue and leveraging our partner program to convert our promising opportunity pipeline. I'd now like to turn the call back to Bob for additional details on our key growth drivers and the outlook for 2024.

[Robert Eckel, executive]

Thanks, Craig. As we look to the full year, we are reiterating our expectations to achieve double-digit revenue and annual recurring revenue growth in 2024. As we look to the future, our expanding pipeline of opportunities and increasing partner acquisition momentum, combined with our growing base of recurring revenue and enhanced operating leverage position us well to achieve sustainable growth and positive cash flow. With these advantages, we are well positioned and have the resources to strategically invest in customer acquisition enablement and back-end fulfillment to support our growth objectives.

We continued the advancement of Aware and in this next stage of growth as a biometric identity platform provider, we're going to further strengthen our offerings as a biometric solutions provider to deliver industry sector-specific solutions for their common use cases. This will be done by providing platforms for partners to build solutions and providing our own targeted solutions. Through this, we can further accelerate the adoption that drives our top line. Ultimately, at a high level, we are here to help organizations improve business results through biometrics. Lastly, before moving to the Q&A portion of our call, please take a few moments to answer the survey built into the webcast player. Matt, please provide the appropriate instructions.

[Matt Glover]

Thank you, Bob. [Operator Instructions] Craig, you highlighted the rapid turnaround in signing and going live with the Turkish bank in Q1. Can you provide some context around the typical time line for such an implementation? And what were the primary factors that drove the expedited time line in this specific case with the bank in Turkey?

[Craig Herman, executive]

Sure, absolutely. The typical time line really depends on a number of factors, right, complexity, products, resources, et cetera. However, there are some pieces that can add velocity to an implementation just like what we saw in Turkey. In this case, we were engaged with a knowledgeable partner in Turkey, DVA. We've been working together with DVA for a number of years. They bring a lot of market and technology knowledge to the table -- is it also a real important piece is a customer that is motivated and has specific milestones and a time line, which, again, this customer did.

And then finally, we're able to move fast due to our understanding of the market, biometrics and their needs that we had gathered throughout the sales process. And when we reviewed that kick off, got us out of the gate really fast. All of these items are ways that this project moved fast and how we anticipate future ones as well.

[Matt Glover]

The next one is for David. David, can you provide some additional context around the nature of the subscription renewal delays and any insights into the underlying factors that contributed to this lower-than-expected growth?

[David Traverse, executive]

Sure. Yes. So the quarter-to-quarter fluctuations that we expect to experience these, especially as a small company, they're largely due to the timing of revenue recognition. So for example, in Q1, there was a delayed or reorder from a large on-prem international agency within our partner ecosystem that we now expect will be completed in the second quarter instead of traditionally in the first quarter. When it is completed, it should contribute to our software subscription revenue in Q2 as well as beyond.

[Matt Glover]

Craig, you mentioned the official launch of the market development funds during the quarter. Can you provide some additional details on what this initiative entails? What are the key elements or components of the market development fund? How do you anticipate it will support your go-to-market efforts going forward?

[Craig Herman, executive]

Yes. Excellent question. In Q1, we made the first of many partner program enhancements. And one of them who was introducing our partner [ MDF ] program. The MDF program underscores our dedication to supporting our partners' marketing efforts in promoting Aware technology as a stand-alone solution or integrated within their own solution.

[indiscernible] now can access funds covering up to 50% of select marketing activity costs that foster lead generation specifically. The activities include running digital marketing campaigns, social campaigns, trade shows and more. The program is funded with a portion of our broader marketing budget and not only provide financial support, but also ensures that our joint lead generation efforts are effective in the marketplace.

By making the funds available, we are able to achieve a few -- a couple of critical things. First, we incentivize our partners to promote Aware's technology specifically, the more partners promoting our brand, the more brand awareness we can develop and the more opportunities we're going to uncover. Second, we gained insight into the marketing practices and corresponding results from our partners. In order to qualify for the funds, partners must submeter request that defines the market activity, specific objectives, target audience, time line, budget, et cetera. After completion of the activities, partners must submit [ proven ] performance, which includes detailed metrics on the activities performance, including reach, engagement, leads generated, et cetera.

And financial documentation confirming the actual expenditure on the activity is critical. As we create closer alignment through our partner program enhancements like this new MDF program -- our enablement programs, we anticipate tapping into the leverage of our expansion partner ecosystem that can provide in our overall go-to-market efforts.

[Matt Glover]

Another one for David. You mentioned the year-over-year increase in recurring maintenance revenue was largely driven by contracts awarded in Q3 2023. You provide some additional context around what caused the delay in recognizing the revenue from those deals? Were there any specific factors or circumstances that led to the delayed revenue recognition compared to your typical time lines?

[David Traverse, executive]

Yes. No, I think we just talked about this a lot in the third and the fourth quarter calls. So what happens, we secured contracts for U.S. government agency as well as our largest [indiscernible] customer. And what that did, that added over $1 million of the company is in your recurring revenue. And now we're starting to see the benefit from that.

[Matt Glover]

Great. The next question. What drove the substantial improvement in operating loss in Q1?

[Robert Eckel, executive]

Yes, I'll take that. I'd say the substantial improvement in operating loss reflected the success and the focus on our cost optimization initiatives. And these initiatives include a significant reduction in headcount across the organization while also strategically investing in the high-growth areas. So by doing so, we're able to significantly streamline our cost structure and lower our revenue breakeven point.

[Matt Glover]

The next question, with approximately $29 million of cash, cash equivalents and marketable securities on your balance sheet, are you currently thinking about your capital allocation strategy going forward? What are the key priorities or focus areas you're considering when evaluating how to deploy this capital to drive the company's continued growth and development?

[Craig Herman, executive]

Yes. I can take this one. So as I think we've been pretty consistent with this messaging in the last few quarters. We're always actively evaluating any opportunities that really have the potential to increase our scalability. However, we haven't identified any candidates that could contribute to our [ substantive ] growth at evaluation that matches our valuation criteria. That said, we do have a robust cash position that gives us the flexibility to pursue any promising opportunities that may arise. But in the meantime, we remain focused on accelerating our organic growth.

[Matt Glover]

Bob, given the company outperformed its expectations ARR by at least [ 15% ] in 2023, how are you thinking about your outlook for 2024?

[Robert Eckel, executive]

Yes. In 2023, we achieved a 23% growth in annual recurring revenue, and we anticipate continuing this momentum through this year. And again, I'm going to reiterate for 2024, we're targeting double-digit growth in both the [ revenue ] and ARR.

[Matt Glover]

Are you targeting double-digit growth in both ARR and revenue for this year? What opportunities in your pipeline are giving you confidence in these projections?

[Craig Herman, executive]

Sure. I'll take that. Aside from the contracts and customers we mentioned on the call, we have a robust pipeline of opportunities are in varying stages across the sales process. To name a few more immediate examples, we are currently in the final stages of negotiation with 3 very exciting opportunities for Q2. The first is a multiyear deal in the Middle East to employ our Knomi solution for digital [indiscernible] management.

Second, we are continuing to expand BioSP's international footprint with an international government contract. And third, we are in the process of securing our largest contract for our ABIS platform. The breadth and diversity of these opportunities showcases the power and flexibility of the aware biometric identity platform, and we're looking forward to expanding on these further in our upcoming calls.

[Matt Glover]

The next question is, will partnerships help in gaining more U.S. customers?

[Craig Herman, executive]

Yes, absolutely. It is a big focus for us, and I'll speak to you recently. We were at the ISC West show where focus was access control. So we really see a market for biometrics in access control that is speeding towards adoption. A lot of that is driven by larger players outside of the biometrics space that are now deploying, including a company like Amazon with the palm [indiscernible] Whole Foods using your palm to pay at Whole Foods.

So we're now seeing access control moving over closer to biometrics to be able to get away from things like using a fob or a key card, things that can be lost or misplaced. And we're getting a lot of attention and interest from groups like MSPs and as well as hardware providers in the access control space. So that's one area where we really see a focus on partners is going to drive that for private and public spaces across the U.S.

[Matt Glover]

Great. Can you talk about the change in competitive dynamics over the last 6 months?

[Craig Herman, executive]

Sure. One of the changes is we've entered into some new markets. So we are now -- we've been spending a concerted amount of time in the gaming market, which has brought up a number of needs that this market has that they haven't thought of before biometrics. So adding biometrics to KYC specifically for gaming has opened up the door for us to now compete with folks that we have not competed with in the past.

And one of the key pieces of this is building out the ability for our integration, and that's something that we have spent on the product side is being able to open up to a lot of different types of products outside of our platform to give more choices and more value to customers. So instead of being a closed system, being an open system that's integrating with our most recent integration was with WooCommerce, which is a division of WordPress, which is specific for the gaming industries where the majority of gaming platforms are on this platform. So now we have a plug-and-play integration that gives us a competitive advantage for folks that are using that specific platform. It also gives us a lot more targets to go after.

So again, we're seeing, as we get into these different verticals, really specific needs. And then on the other side of the platform [ you really ] or the other side of the fence, you're really starting to see a lot more market adoption, which is what we're excited about, where people are getting much more accustomed to using biometrics, whether that's palm, finger, face, voice, we really see that's going to help us continue to grow.

[Matt Glover]

Great. At this time, this concludes our question-and-answer session. If your question wasn't answered, please e-mail Aware's IR team at [e-mail]. I'd now like to turn the call back over to Bob for closing remarks.

[Robert Eckel, executive]

I'd just like to thank everyone for joining us on today's call and also thank our employees, partners, shareholders for their continued support. And as a reminder, we welcome your feedback and insight through the survey built into the webcast player. Further, you may learn about our strategy in the investor presentation that's available on our website, and we look forward to updating you on Aware's progress on our next call. Over to you, Matt.

[Matt Glover]

Thank you, Bob. I'd 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 First Quarter 2024 conference call. You may now disconnect.