Aware Inc

NASDAQ:AWRE

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Matt Glover]

Good afternoon, and welcome to Aware's Second Quarter 2024 Conference Call. Joining us today are the company's Chief Executive Officer and President, Robert Eckel; Chief Financial Officer, David Traverse; Chief Revenue Officer, Craig Herman; and Chief Product Officer, Heidi Hunter. [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 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 indicated by such statements. These and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly on Form 10-Q.

Any forward-looking statements should be considered in light of those factors. You are cautioned not to place undue reliance on 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 measures in the company's earnings release issued today.

I'd like to remind everyone that this presentation will be recorded and made available for replay via a 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 closed, we reported our results for the second quarter ending June 30, 2024. A copy of the press release is available in the Investor Relations section of our website.

For today's call, I'll start with our financial and operational highlights. David, our CFO, will then detail our financial results, followed by Heidi, our CPO, who will review our biometrics platform and strategic vision. Craig, our CRO will cover key business developments and customer wins, and I'll conclude with our strategic outlook before we open for questions.

We continued our strong momentum through Q2 enabling us to deliver impressive financial results for the first half of 2024. In the second quarter, we generated 36% and 31% year-over-year increases in total revenue and recurring revenue, respectively, driven both by new customer acquisitions and expanded relationships with existing clients across both our key markets and core product lines. Craig will go into more depth on these key contract wins in a few moments. We also maintained our cost optimization in the quarter, which is reflected in a 7% decrease in operating expenses compared to the prior year period.

In the first half of 2024, our focus on operational efficiency and sustainable growth yielded a remarkable results. We achieved a robust 17% year-over-year increase in our top line, coupled with a substantial 51% improvement in our bottom line. Additionally, our recurring revenue grew by 14% compared to the same period last year. These achievements underscore our continued progress in expanding and securing our recurring revenue customer base, enhancing our product portfolio in implementing effective operational efficiency initiatives, demonstrating our commitment to long-term value creation and positions us for continued success in the market.

We're thrilled with our appointment of Heidi Hunter as our new Chief Product Officer. With over a decade of experience in the identity space, product strategy, development and fraud prevention, Heidi brings a wealth of experience to Aware. Heidi will bring her impressive track record in achieving product market fit and driving adoption to lead the enhancement of our product offerings and spearhead our expansion in the commercial sector.

While Heidi will shortly share more about our background and initial plans for aware, I wanted to take this moment to introduce her and express our enthusiasm for the valuable perspective and leadership she brings to our team. Her appointment represents a significant step forward in our mission to deliver cutting-edge solutions and drive sustainable growth.

I'll now turn the call over to David, who will discuss our financial results for the second quarter and the first half of the year. Over to you, David.

[David Traverse, executive]

Thank you, Bob, and good afternoon, everyone. Turning to our financial results for the second quarter ended June 30, 2024. Total revenue was $4.3 million, marking a 36% increase from 3.2 million in the same quarter of last year. This growth was driven by 2 key factors: Recurring revenue increased by $600,000, underscoring our success in building a stable, predictable income stream and license sales that contributed an additional $0.5 million. This was primarily due to an expansion deal with an existing European customer. This demonstrates our ability to grow with our current client base and highlights our expanding international presence.

These results reflect our dual strategy of long-term client relationships while also capitalizing on opportunities for larger recurring opportunities or one-time sales. The substantial year-over-year validates our business model and position us well for continued expansion in both recurring and license-based revenue streams.

Now moving down the income statement. Operating expenses were $5.7 million, a $0.5 million or 7% year-over-year decrease compared to $6.1 million in Q2 of last year. Operating loss improved 54% year-over-year to $1.3 million compared to a loss of $2.9 million in the same year-ago period. GAAP net loss totaled $1.1 million or $0.05 per diluted share, a 59% improvement compared to a loss of $2.7 million or $0.13 per diluted share in Q2 of 2023.

Our adjusted EBITDA loss, which we reconciled to GAAP net income in our earnings release totaled $1 million, an improvement compared to a loss of $2.4 million in the same year-ago period.

The year-over-year improvement in net loss and adjusted EBITDA was primarily due to increased revenue and continued reductions in operating expenses.

Turning to our financial results for the 6 months ended June 30, 2024. Total revenue was $8.7 million, up 17% from $7.5 million in the first half of last year. This was driven by a $700,000 increase in recurring revenue and a $0.5 million increase in license sales from existing customer expansions.

Recurring revenue grew 14% year-over-year to $5.9 million or 67% of total revenue, underscoring our continued shift towards a more predictable revenue model. The growth in both total and recurring revenue reflects the strength of our business model and the increased value our solutions provide to customers. Our focus on nurturing long-term client relationships is paying off, positioning us well for sustainable growth in the future.

Our operating expenses decreased $1 million or 8% year-over-year to $11.3 million compared to $12.3 million in the prior year. Operating loss improved 46% year-over-year to $2.6 million compared to an operating loss of $4.8 million in the same year-ago period.

Net loss totaled $2.1 million or $0.10 per diluted share, a 51% improvement compared to a net loss of $4.2 million or $0.20 per diluted share in the first half of 2023.

Adjusted EBITDA loss improved to $1.9 million, which compares to a loss of $3.8 million in the same year-ago period.

Turning to our balance sheet. Cash, cash equivalents and marketable securities totaled $27.4 million as of June 30, 2024. This compares to $30.9 million as of December 31, 2023. Our robust financial foundation empowers us to strategically pursue growth opportunities and make targeted investments. We are actively exploring initiatives to enhance our technology edge seeking avenues to expand our market presence and carefully evaluating opportunities that align with our long-term vision. This approach allows us to remain agile in a dynamic market, capitalize on emerging trends and technologies and ensure sustainable growth and value creation.

As we've talked about, we maintain a disciplined approach to capital allocation, balancing prudent investments with maintaining our financial strength. This strategy positions to seize opportunities that will drive innovation, expand our reach and ultimately deliver increased value to our shareholders.

Our focus remains on opportunities that not only complement our existing portfolio, but also have the potential to significantly accelerate our growth trajectory and strengthen our competitive position in the market.

This completes my financial summary. I'd now like to turn the call over to Heidi to let her introduce yourself. Heidi?

[Heidi Hunter, executive]

Thank you, David. I'm very happy to have the opportunity today to speak to the investor community about why I joined the Aware leadership team and to share my excitement and perspective on the incredible transformative path Aware is on.

I have spent the lion's share of my career working in the identity industry. Before joining aware, I worked in various roles in product strategy and customer success for a global identity provider. I'm sure you can imagine over that time, I truly observe the ever-evolving transformation of how organizations must identify and authenticate the identities they want to do business with.

I love working with engineers to build advanced products that delight customers and help them evolve their business through software. I wanted to continue advancing my career and contributions in the identity space with an organization that built biometric solutions and focused on transformative AI-driven technologies.

After discussing Aware's vision and strategy with Bob and understanding Aware's tenure, legacy and breadth of solutions, I felt it was a great opportunity and fit. I'm very excited to be part of the company's transformation.

Now that you have a little background on me, I'd like to discuss who Aware is in the company's innovation and transformational journey over the last few years in more depth for those new or relatively to the story.

Over the past 4 years, Aware has strategically shifted towards a recurring revenue model, capitalizing on its established biometric technology and expertise. This transformation is driven by our robust technological foundation and forward-looking business practices, merging our legacy of innovation with market-driver evolution.

Formerly focused on supplying multimodal biometric components to government IT integrators, Aware has restructured and integrated these elements into a comprehensive biometric identity platform. Today, this platform allows customers to tailor solutions to their specific needs, whether deployed on-premises or through Software-as-a-Service.

By expanding our partner network to include value-added resellers, OEMs and a wider range of IT integrators, we've extended our market presence beyond government sectors to encompass diverse commercial applications, democratizing access to biometric technology across all organizational sizes.

Aligned with acuity market intelligence, digital identity prism framework, Aware began with core biometric technology and has evolved into a leading biometric identity platform provider. Augmented by authentication and identity verification features alongside our biometric orchestration product, our modular, scalable approach supports organizations across industries and varied use cases.

Looking ahead, Aware aims to further industry transformation by developing sector-specific preconfigured biometric solutions for vertical markets, fostering innovation within our partner ecosystem. Our dedication persists in advancing technology and facilitating digital identity solutions for both commercial and government clients, ensuring our offerings cater comprehensively to identification, verification and authentication needs.

I'm thrilled to join the Aware team. And with that, I will hand it over to Craig to give an update on the advancements and progress we've made in the company's go-to-market strategy.

[Craig Herman, executive]

Thanks, Heidi. In Q2 2024, we secured several significant deals across both our core products and geographies, underscoring the growing demand of our advanced biometric solutions in both government and commercial sectors. This quarter, we secured 6 key contracts in our ABIS, Knomi, AwareID and BioSP product categories. Of these deals, several were contracts with the U.S. federal government. These deals were a mix of commercial, law enforcement and U.S. government agencies.

Aware is trusted not only by all 3 branches of the U.S. government, but also by more than 20 countries. Over 60 partners, over 20 financial institutions and 150 law enforcement agencies. Our biometric solutions are used by numerous countries, agencies and large commercial organizations that you are all familiar with.

Our multimodal platform also continues to gain traction. We achieved wins with our fingerprint, iris and facial recognition technologies, all of which are experiencing growing demand within the market. We expect this momentum to continue, and we are seeing increasing opportunities for our differentiated and innovative platform across both the government and commercial sectors.

With our breadth of use cases and our hard earned legacy solutions, we are poised to capitalize on this increasing demand. We also further enhanced our partnership ecosystem in Q2. This quarter, we emphasized optimizing our partner network to enhance onboarding enablement. Not only did we add new partners to our network, but we also removed nonperforming partners, which will help us moving forward. We believe we have the right partners in place, with the right resources and healthy visibility into future partnerships that will enable us to convert our robust pipeline.

We also launched and secured some key partnerships for AwareID that we expect to drive significant growth. As a proof point of this success, as Bob mentioned, we made significant strides in expanding our global footprint through renewed and expanded contracts across key regions, including the United Kingdom, Brazil and EMEA. This included securing a $400,000 license expansion in Europe, underscoring our ability to foster strong client relationships and capture additional market share.

Another notable win I'd like to call out in Q2 is securing our largest ABIS contract to date, a $1.2 million 5-year agreement. Once this contract has gone live, we anticipate it will significantly bolster our recurring revenue stream and increase operating expense leverage going forward. Another key aspect of this contract is that it reflects our increased focus on being more diligent and deliberate about the opportunities we pursue. By that, I mean we are prioritizing strategic opportunities that are well suited for Aware's current technology portfolio, which is expansive in terms of use cases without compromising security or customer experiences while also enabling us to increase cost optimization and recurring revenue.

Regarding our breadth of use cases, I'd like to highlight a few where our technology has had significant impacts. In law enforcement, we partnered with a leading police department in solving over 45 cold cases with advanced biometric systems and analysis tools, substantially improving their closed case rate. In Financial Services, a large bank in South America leveraged Aware AI-enabled liveness detection algorithms integrated into their workflow to reduce their fraud rate by 87% and save millions of dollars in the first year.

As we move forward, our team remains steadfast in converting a robust and growing pipeline by driving subscription-based revenue through enhancing AwareID's product market fit and leveraging our partner network.

Now I'll turn the call back to Bob for further details on our strategic growth initiatives and 2024 outlook. Bob?

[Robert Eckel, executive]

Thanks, Craig. Looking ahead to the second half of the year, we remain confident in our expectations to deliver double-digit revenue and annual recurring revenue growth in 2024. With the top and bottom line year-over-year improvements we generated in the first half of the year as well as increased visibility and consistency in our robust pipeline Craig discussed, we believe we are on track to achieve our 2024 expectations.

Strategically, we remain focused on executing our multifaceted growth plan, which revolves around several key initiatives: one, enhancing predictability through recurring revenue in SaaS models; two, expanding our global partner ecosystem to maximize opportunities with technology integrators and OEM partners; three, prioritizing growth by cross-selling and upselling to our established customer base led by our dedicated customer success team; four, entering new commercial markets with targeted use cases while empowering partners to diversify their revenue streams; five, maintaining technological leadership through our R&D innovation team and operational data, AI and machine learning capabilities to address emerging security challenges; and six, continually reviewing strategic collaborations and acquisitions to expand our capabilities and market reach.

We continue to drive customer value with sector-specific preconfigured biometric solutions for common use cases balancing both security and customer experience. Given our strong financial foundation, we believe we are poised for top line and ARR growth and profitability as we further our innovation product market fit as we work closely with our clients in adapting to market changes. We continue to enable and leverage our partners as well as our direct relationships, providing our own preconfigured offerings as well as platforms for partners to build their own solutions.

Aware consistently strives to be recognized as a company associated with biometric simplified. We are here and ready to improve our customers' business results through biometrics.

We will now move to the Q&A portion of our call. Matt, please provide the appropriate instructions.

[Matt Glover]

[Operator Instructions]. Our first question, Craig, you highlighted increased demand for wares biometric technologies, specifically Iris fingerprint and facial recognition. Could you elaborate on the key factors driving this growth across these different modalities? Are there particular industries, applications or market trends fueling this demand?

[Craig Herman, executive]

Great questions, Matt. Yes. So the biometric systems market is continuing to experience rapid expansion with projections today indicating at least 14% growth over the next 5 years, reaching approximately $83 billion. This growth is particularly evident in the U.S. federal government sector, where we've also seen increased adoption of iris recognition technology. I just spent some time at the U.S. biometric forum last month and it's very clear that multimodal biometrics, including iris as well as concerns about ratio bias were widely reviewed and discussed.

These are a few of the markets driving and fueling this growth. We're seeing increasing demand for consumer convenience coupled with a growing need for business efficiencies. There's also wider acceptance and adoption of biometrics by consumers. New government and commercial compliance requirements and regulations, both domestically and internationally are further propelling this market.

Additionally, rising occurrences of identity fraud and its increasing sophistication, i.e., deepfakes along with the escalating frequency of internal and external data breaches are driving demand for robust biometric solutions. These drivers are consistent across all our target industry verticals and align closely with our go-to-market strategy. This is positioning Aware to capitalize on these market trends effectively.

[Matt Glover]

Heidi, as the Chief Product Officer, can you talk through the initial -- your initial initiatives to drive Aware's market penetration in the commercial space?

[Heidi Hunter, executive]

Absolutely. I think most importantly, my first primary initiation was executing honestly, the thing I love most about my job, spending time with the products and the teams that are building and selling and supporting them. So since joining, I've spent time testing the solution and reviewing the capabilities and the work that the team has done historically, but specifically within the last year, 1.5 years. And this is important because it's the foundation for my effort. I really need to understand the breadth of what Aware has today, what we have and think about how we apply and translate that into the spaces that we're focused on.

So since joining, doing this is providing me with an opportunity to really conceptualize and strategize and document the various ways our portfolio applies to the different market areas we want to penetrate in the commercial space. So moving that forward now together with the marketing and sales leadership folks, we're now incorporating all this detail into our presentation of ourselves to the commercial market and the execution of our sales strategy. My opinion, my insights is that aware solutions are really feature-rich and there's a lot of opportunities to attract and delight customers and our strategic focus areas.

And we're also taking care through this approach to really work through a framework of repeatability and adding leverage, and that affords us the ability to try, learn and take that corrective action as we work together to drive our market penetration. And I truly believe with my experience in the commercial identity market, I'm going to enable the team to execute at a faster rate while reducing the amount of time needed to bring new product enhancements to the market.

[Matt Glover]

Thanks, Heidi. You mentioned removing nonperforming partners from your partner program this quarter. Could you elaborate on this process? Additionally, what impact do you expect this partner program optimization to have on your business going forward?

[Craig Herman, executive]

Yes, certainly. We don't find performing versus nonperforming partners using multiple metrics. So key indicators of a successful partner. This could include resources assigned to the biometrics on the partner side, overall business focus, marketing resources and actually utilization of our resources for enablement and co-marketing. We also assessed the partner's engagement in joint sales efforts, their consistency in bringing new opportunities as well as the revenue growth through the partnership.

Expanding our recurring revenue and market share relies heavily on an active, engaged and enabled partner ecosystem. We want partners who actively contribute to our mutual success, not just carry our name. We're a lean organization, and we want to be effective, efficient and focus our resources on partners that are also invested in driving the revenue needle. We regularly review these metrics to identify value-adding partners, those consistently falling short maybe considered nonperforming.

This ongoing evaluation helps us optimize our program, focus resources on relationships that drive results for both parties. By maintaining high partnership standards, we're creating a more efficient ecosystem that will support our long-term growth objectives.

[Matt Glover]

Great. Bob, could you break down the key factors behind the 54% year-over-year reduction in Q2 operating loss? Which areas improved most? And was this driven more by revenue growth or expense management? Are these improvements sustainable? And how do they align with the overall financial strategy?

[Robert Eckel, executive]

Yes, Matt. The 54% year-over-year reduction in operating loss was a combination of revenue growth and cost optimization initiatives that we've implemented and executed over the past several quarters that started back in Q3 of 2023. As we anticipated in our previous earnings calls, Q2 has indeed seen more substantial benefits from these efforts. So our approach has been twofold. As I've mentioned before, cost management. We've been diligent and deliberate with our spending carefully evaluating each expense to ensure it aligns with our strategic objectives. This enables us to leverage our product offerings that are most in demand.

On the revenue growth side, simultaneously, we focused on driving increased top line and recurring revenue growth, and this is through term and subscription contracts, which has also positively impacted our bottom line. So overall, growth with profitability remains a top priority for us. We're committed to maintaining this balance between the prudent cost management and the strategic investments for growth.

So overall, this planned reduction in operating loss aligns with our overall strategy of achieving sustainable profitability while still investing in areas that drive long-term growth.

[Matt Glover]

Craig, we've got a multipart question here. Could you update us on our progress in the gaming sector, including the reception at the recent iGaming event and any new partnerships? What unique challenges or opportunities are you seeing for our biometric solutions in gaming? Also, are there other sectors showing increasing demand for our technologies, how are we positioning ourselves to capitalize on these opportunities?

[Craig Herman, executive]

Yes. We're super excited about the gaming industry and what we've been -- what we've been able to do, quite honestly, in a short amount of time in this industry. We've secured some key partnerships that are really driving traction with new customers on this front. We're still learning the market a bit as well as the regulation nuances. There is a great need for a complete biometric-based KY solution. That is definite. It needs to be easily implemented and supported.

So we couple this with our recent productized integration with Wu Commerce. This has given us some great momentum in the marketplace. Another one that we're really excited about and starting to see some traction is the access control market. This is a massive market that spans across both physical and online access control and specifically through our partner network, biometric solutions for access control issues are becoming more of a consistent request. We're especially seeing these use cases arise in the Middle East and our LatAm markets.

[Matt Glover]

Thanks, Craig. Bob, do you have an updated target time frame for reaching a sustainable cash flow positive operation?

[Robert Eckel, executive]

Yes, I'll take that. As you know, we've made significant progress relative to leveraging our existing technology, which includes our software stack across multiple solutions in our product suite, and we're maximizing our investment. So this has allowed us, as I just said a moment ago to reduce our operating expenses by 8% in the first half of 2024 compared to 2023. And while also growing revenue 17% in the same period. So we feel that we're well positioned to continue to grow our top line revenue, and that should result in sustainable positive cash flow in the near future.

[Matt Glover]

Our next question. Can you provide an update on the SoftwareOne partnership. Additionally, what differentiates aware on the AWS marketplace?

[Craig Herman, executive]

Sure. We continue to work with SoftwareOne, and they've helped us considerably, especially in the Brazilian market. They are fantastic technology partner to us and continue to give us great guidance. On the AWS marketplace side, we needed to invest in additional development to really satisfy some of the specific requirements that have come up in the process. We made a decision as a business to focus these resources in areas that have a direct line of revenue while working through the specific requirements in parallel.

This building as well as the additional momentum that we're gaining in some of the markets that are targeted by AWS coupling these 2 really makes us feel really good about our differentiation when we do enter into the marketplace. The AWS marketplace is still a part of our strategy. But based on what we are seeing in the markets, current behind buying behaviors and cycles, we are really taking advantage of other partner-driven opportunities in the short term.

[Matt Glover]

Thanks, Craig. Our next question, it's regarding your $0.4 million license expansion in Europe, what kind of user organization is that?

[Craig Herman, executive]

Sure. I can't go into the specific one, but it is a government entity in Europe, one that we have been working with and also alongside a partner. So this touches both our government sector as well as our partnership ecosystem and it's an expansion of additional licenses. So what we're seeing is more and more users leveraging our platform and our tools in Europe.

[Matt Glover]

Thanks, Craig. Our next question. When you say commercial identity, are you referencing KYC compliance and checkout identity products?

[Heidi Hunter, executive]

I think that one's for me. Heidi. Yes, I am. And honestly, if you've been in the space as long as I was over 12 years, you know that I think a lot of identity began as KYC compliance. But as we have traversed into completely being digified and everything is the digital experience that when you talk about being an identity, it's really covering both. So I was there from that transition where we started doing KYC primarily for compliance in a digital environment to the state we're in now, where anytime there's data collection or collection of biometrics, somebody is verifying something about you on your phone. So I've seen it all.

[Matt Glover]

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]

Yes. I just want to thank all of you for joining us today. And as always, I'd like to express my sincere appreciation to our employees, partners, shareholders for their unwavering commitment and support. For those seeking more information, I encourage you to review our investor presentation on our corporate website and that provides additional details about our strategic initiatives. We look forward to updating you further on Aware's progress during our next webcast.

Matt, back over to you.

[Matt Glover]

Thanks, Bob. I'd like to remind everyone that a recording of today's call will be available for replay via link in the Investors section of the company's website. Thank you for joining us for Aware's Second Quarter 2024 Conference Call. You may now disconnect.