Aware Inc

NASDAQ:AWRE

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Matt Glover]

Good afternoon and welcome to Aware's Third Quarter 2023 Conference Call. [Operator Instructions]

Before we begin today's call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on the current expectations of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today.

Aware wishes to caution you that there are factors that could cause actual results to differ materially from those results indicated such statements. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made.

Although it may voluntarily do so from time to time, Aware undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required applicable securities laws.

Additionally, this call contains certain non-GAAP financial measures that are defined by the SEC and Regulation G. Non-GAAP financial measures should be considered in isolation from or a substitute for information presented in compliance with GAAP. Accordingly, Aware has provided reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release issued today.

I would like to remind everyone that this presentation will be recorded and made available for replay via a link available in the Investor Relations section of the company's website.

Now I'd like to turn the call over to our CEO and President, Bob Eckel. Bob?

[Robert Eckel, executive]

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. I'm excited to talk to you about our exciting things that have been going on at Aware. After the market closed, we announced our results for the third quarter ended September 30, 2023. A copy of the press release is available on the Investor Relations section of our website.

Before reviewing our financial and operational highlights from the third quarter, I want to give you a quick overview of Aware and what makes us different. That way, those of you who are new to us have a better understanding of Aware. Aware is a global biometric platform company that uses data science, machine learning and artificial intelligence to tackle everyday business and identity challenges through biometrics. We're working to enhance trust in an increasingly connected world through our mission of balancing security and user experience through our technology.

Our offerings facilitate digital onboarding, authentication and life cycle management of the user's biometric identity through proven, responsible and trusted multimodal adaptive biometrics. Over the last 30 years, Aware has proven the value of our offerings by continuing to be chosen by governments and commercial organizations alike for our experience and our hardened portfolio. Our reputation in the biometric industry has earned us trusted spots with core government agencies in the United States, Canada, the U.K., Germany, Australia and more. In fact, we are a worldwide leader in biometric data orchestration for immigration and border management.

We're also trusted by industry leaders like the largest banks in Brazil and Turkey, among others, for onboarding and authentication. Further, we have championed the responsible use of technology, specifically leveraging artificial intelligence and machine learning to create software that ethically achieves demographic neutrality and equity, meaning we have purposely emphasized the need for treating all individuals equitably.

During research, design, development, testing and refinement, we train our algorithms on some of the largest and most diverse data sets in the world. This has given us the #1 position in minimizing, practically eliminating, bias based on age, gender or race as independently tested and confirmed by NIST.

Also, we believe in consent-based biometric technology, meaning outside of specific forensic applications and law enforcement and defense and intelligence, only people who consent to leverage biometrics are users of our technology. Additionally, our agnostic approach allows customers the flexibility they need to build on past investments rather than rip and replace, a common industry practice that promotes waste.

Third, we've earned our trusted status through a portfolio that mitigates threats and asserts the integrity of identity in a future-proof way. Since Aware doesn't outsource any biometric technology, we are the only biometric provider our customers need to work with. And if a new attack vector emerges, we are able to work directly to address it without needing to wait on a third party to upgrade their algorithms first or get recertified.

Further, we set the bar for liveness in the industry. In a recent independent NIST benchmarking study, Aware took the top spot in security for both impersonation and evasion detection for one of the presentation attack types, the only provider to do so. Ranking top 5 in security and top 10 in convenience across the strong majority of presentation attack types for evasion, Aware is the only provider who has successfully found the balance of security and user experience with the ability to configure solutions appropriately for every use case.

And lastly, before I discuss the progress we've made to accelerate growth and drive greater scale for Aware, I want to point out how important it is for us to offer future-proof solutions. An organization's business requirements will evolve over time as well the external landscape. Our offerings and platform can scale with customers, adapt to changing environmental conditions, risk profiles or consumer demands and anticipate and/or respond to future attack vectors. This positions us well to maintain the customer satisfaction needed to retain and expand the recurring revenue we've been building.

In fact, since I joined the company at the end of 2019, we've grown recurring revenue 83% or 16% annually from $5.4 million in 2019 to nearly $10 million over the trailing 12-month period ended September 30, 2023. We expect to end 2023 with more than $11 million in recurring revenue, providing solid visibility going into the new year.

Now with that background and context, I'd like to discuss our operational and financial achievements for the third quarter of 2023. In Q3, we expanded our recurring customer base through our continuous efforts to enhance our market-leading technology and develop our partner ecosystem. Q3 was a very strong quarter for Aware and reflects the tremendous progress we've made driving profitable and more predictable growth.

This quarter, we generated $2.5 million in operating cash flow and continued building upon the foundation for future recurring revenue. After working through several deals that were delayed over the past few quarters and months, we secured a $3.4 million contract that along with annual maintenance options, has a 5-year value of up to $5.1 million, which expands our footprint in the U.S. government as well as us beginning to recognize revenue from the 5-year $5 million contract we secured with our largest BioSP customer in Q2. Both contracts reflect the trust leading government agencies place in us and when combined with our new AwareABIS contracts are expected to contribute more than $1.5 million to our annual recurring revenue.

Additionally, our partner-focused selling motions have enabled us to reduce our selling costs while increasing new business conversion at an accelerated pace. In fact, during Q3, we had 4 new accounts go live and signed 2 new contracts with our partners for AwareID. Our strong third quarter performance reflects our continued efforts to increase ARR and drive sustainable future growth.

Craig will walk you through our key customer wins and progress on our go-to-market initiatives in more detail. But I wanted to touch on a few more highlights first. After emphasizing the development of our customer success team over the past few quarters, we're excited to finally have a formal partnership program in place. Aware has a strong commitment to partner success, and we look forward to directly collaborating with our partners to convert the growing market demand into more wallet share for us and our partners.

Our AwareABIS offering delivered as intended, and we believe the solution has found an excellent niche in the underserved market. We deployed AwareABIS to 3 law enforcement agencies, of which 1 is on-prem and 2 are cloud-based. Of The 3 deployments, 1 began producing recurring revenue in Q3, and the other 2 will begin producing recurring revenue in Q4.

In conjunction with an enhanced partner ecosystem, we also optimized AwareID to make it even more versatile, secure and accessible by introducing facial identification capabilities and improving the back-end functionality. Now businesses of all size can easily incorporate our world-class biometric authentication without changing their back end.

Furthermore, we added a developer hub platform, which encourages developers to experiment with AwareID's capabilities to help build brand affinity amongst the engineering and developer communities.

Even though we are continuing to optimize AwareID's market fit, it's important to note that AwareID is opening doors across all our biometric solutions to high-quality opportunities with large and recognizable brand names. As I mentioned earlier, our technology is recognized as a top performer industry-wide and most recently, our pad algorithms were ranked #1 in security for both impersonation and evasion for presentation attack Type 4A in the NIST fake benchmarking test. Aware has also recently been named an industry catalyst and role model in the 2023 Biometric Digital Identity Prism Report.

While we can't and don't plan to announce every contract that we've secured or are working to secure, Aware is consistently winning business in competitive markets. Our ability to anticipate market trends and adapt our award-winning solutions to specific customer needs continues to contribute to our market leadership.

Now before moving on to our financial performance, I'd like to briefly address last week's 8-K filing. As noted in the filing, Aware has streamlined its financial organization. Dave Barcelo is no longer with the Aware. As part of this realignment, we have promoted our Corporate Controller, David Traverse, to Principal Financial Officer. Dave Barcelo was with Aware for over 3 years, and we are very fortunate to have his leadership. We cannot thank him enough for his contributions and wish him all the best in his future endeavors.

We have total confidence in David Traverse fulfilling the financial leadership role. Some of you may recall David from a previous earnings call when he stood in for Dave Barcelo. David joined Aware 3 years ago as Vice President and Corporate Controller. He's got an extensive background in finance and public accounting.

Prior to joining Aware, David was Vice President and Corporate Controller at SeaChange International and Vice President, Finance and Chief Financial Officer at Airtel Video Systems. He has also worked as a certified public account in several public accounting firms. We may not track filed a 10-Q on time and do not anticipate this change to impact our filing cadence or Investor Relations activities.

Lastly, we are committed to exiting this year with neutral operating cash flow and continue to optimize our cost structure, focus on maximizing our operating cash flow as we prepare and enter 2024.

I'll now turn the call over to David to walk us through our financial results for third quarter 2023. David, over to you.

[David Traverse, executive]

Thank you, Bob, and good afternoon, everyone, on the call. It's a pleasure to be back here again with you today. Turning to our financial results for the third quarter ended September 30, 2023. Total revenue was $6.4 million compared to $3.2 million for the second quarter of 2023 and $3 million for the same year ago period. The increase in total revenue was primarily due to higher software license sales in the period.

For Q3 2023, recurring revenue was $2.2 million. The $2.2 million in recurring revenue was up 5% sequentially and 4% year-over-year. Operating cash flow for the quarter was $2.5 million compared to usage of $2.2 million in the prior quarter and usage of $2 million in the same year ago period.

Looking at our operating expenses, including the impact of onetime events. Our third quarter 2023 operating expenses were $5.6 million, a decrease from $6.1 million in the prior quarter and up from $600,000 in Q3 of last year. Operating income for the third quarter of 2023 was $700,000 compared to an operating loss of $2.9 million in the prior year quarter and operating income of $2.4 million in the same year ago period.

For the third quarter of 2023, GAAP net income totaled $1.1 million or $0.05 per diluted share compared to a GAAP net loss of $2.7 million or $0.13 per diluted share in Q2 2023 and GAAP net income of $2.6 million or $0.12 per diluted share in Q3 last year.

Please note that operating expenses, operating income and net income for Q3 of 2023 included an $800,000 onetime gain related to our adjustment to the fair value of the contingent acquisition payment from our 2021 acquisition of FortressID and that operating expenses, operating income and net income of Q3 of 2022 included a $5.7 million onetime gain related to the sale of the company's building located in Bedford, Massachusetts in July of 2022.

Our adjusted EBITDA for the quarter, which we reconcile to GAAP net income in our earnings release, totaled $400,000, which compares to adjusted EBITDA loss of $2.4 million in the prior quarter and a loss of $2.5 million in the same year ago period. The significant improvement in adjusted EBITDA was primarily due to higher revenue.

Looking at our balance sheet. We ended the quarter at $27.5 million in cash, cash equivalents and marketable securities compared to $25.1 million at the end of the prior quarter. We repurchased 81,083 common shares of stock at an average price of $1.52 per share as part of our previously announced share buyback program. We believe repurchasing our common stock at certain valuation levels presents an attractive opportunity given our strong balance sheet and growth prospects.

As we exit 2023, we are supported by a strong and improving cash balance and no debt. Our robust balance sheet enables us to evaluate every high-ROI opportunity that has potential to advance our strategic growth road map.

That completes my financial summary. I'd now like to turn the call over to Craig to discuss the advances we made in our go-to-market strategy. Craig?

[Craig Herman, executive]

Thanks, David. It's great to be here with you all today. As Bob discussed, Q3 was a very strong quarter for Aware. We continue to protect and scale our recurring revenue base through the implementation of a formal partner program, further product enhancements and capabilities and capitalizing on the high-quality opportunities in the pipeline.

Building upon the foundation we laid last quarter for future recurring revenue, we closed several deals that were previously pushed to the right, including the large multimillion-dollar, multiyear U.S. federal government contract Bob mentioned earlier.

After receiving a lot of positive feedback from our customers, we incorporated facial identification capabilities, enhanced front-end document capture and better processing functionality into AwareID. In addition to the back-end support and user experience improvements, we included new mobile application frameworks, Flutter and React Native. The AwareID platform now provides value for various use cases without compromising accessibility, an improved security and user experience and provides various levels of technical access for developers.

As Bob mentioned, we also debuted a developer hub, which is generating excitement for the platform and the developer community and providing easier access to development resources for our customers.

We also partnered with a reputable outside firm to harden AwareID's SaaS infrastructure to expand the potential reach of our previously announced partnership with Software One. We expect these changes will have a positive impact on our opportunities in the U.S. commercial market in Latin America as a whole.

During Q3, we launched a formal partner program to accelerate adoption of our offerings and expand our global reach. Our partner ecosystem is built around 3 areas of focus to maximize the program's potential reach. The first being transparency. Providing greater clarity and transparency around products, road map, pricing tiers and incentives for current and future partnerships are crucial to integrating our partners into the ecosystem rather than simply being a vendor.

Along those lines, the second focus is education. After doing a formal survey with our partners and leveraging an outside consultant, it became clear that not all our partners had a clear understanding of everything Aware offers, which is why we opened our access to our library of product and marketing resources. Partners are now armed with our product guides, sales decks, API guides, et cetera, which has allowed them to be better educated on our solutions and has enabled them to be more effective sales agents.

The third piece of the pie, so to speak, is a co-marketing approach, which entails regular internal communications, such as attending trade shows together, assisting with marketing collateral and costs and helping with signage. We have done several webinars with our partners over the last few months on relevant topics to continue to showcase Aware's thought leadership in the industry.

A great example of the evolution of our partner ecosystem is our relationship with UKAD. Recently, we sat at the same booth with them at the largest Middle Eastern Technology Conference, Gitex. Since announcing the partnership in March this year, UKAD has been instrumental in expanding Knomi's footprint in the Middle East. And they have grown from a system integrator to a product company as well. The launch of our partner ecosystem now allows Yuquan to leverage both their local market knowledge and presence and Aware's marketing resources to broaden the reach of all our solutions in the region.

With an ever-improving product portfolio and formal partner ecosystem, we believe that we are well positioned to capitalize on the high-quality opportunities flowing through our pipeline. We are continuing to see strong demand on the government side in North America and Europe and are working to close multiple deals with the U.S. federal government. The confidence the U.S. government has in our fraud protection is translating into promising leads with prominent government agencies in Canada, the United Kingdom, Lat Am and the Middle East.

Moreover, by leveraging these robust government relationships, we can accelerate our breakthrough into the U.S. commercial market. We've seen a recent uptick in interest on the commercial side for Aware and have gained a lot of traction in the gaming space as well.

Latin America remains our strongest and most competitive market, especially Brazil, where we have multiple encouraging competitive opportunities. We are also deep in the selling process with several deals in Mexico, Chile and other Latin American countries.

Despite the geopolitical turmoil in the Middle East, we remain optimistic about the demand and opportunities in Egypt, UAE and Jordan. Previously, we were very bullish on our prospects in Israel and Iraq. However, considering recent events, we have consulted an outside source to gain a better understanding of how it will affect the market. As we look forward, my team's initiatives for Q4 and 2024 will evolve around securing AwareID as a leader in our target markets as well as solidifying its market fit, building upon and generating additional momentum amongst our government customers, driving incremental revenue from the commercial side and closing out our pipeline.

Now I would like to turn the call back to Bob for more color on our key business drivers. Bob?

[Robert Eckel, executive]

Thanks, Craig. Building upon the foundation we've laid over the past few quarters, we've generated meaningful cash flow and recurring revenue in Q3 through our efforts in new contract structure in our newly secured and expanded customer base. Through the continuous evolution of our technology and the launch of a formal partner program, we continue to leverage our customer relationships to optimize spending, drive recurring revenue and accelerate adoption for our SaaS-based platform.

I'm proud of the revenue team and their efforts that have led to the highest quarterly revenue since Q2 of 2016 and the highest level of quarterly operating cash flow since Q4 of 2018.

Looking at the remainder of the year, we are increasingly confident in our ability to achieve or exceed our financial goals, which includes growing total revenue and ARR by 15% in 2023 and to exit the year with neutral operating cash flow, which means we manage both inflows and outflows towards profitability while taking into consideration seasonal timing of cash outlays.

With our strong performance this year and especially Q3, we are confident we can reach or exceed our cash goals and believe we are well positioned to continue ramping up recurring revenue and driving sustained growth. We're excited for Aware's future and appreciate everyone's continued support.

With that, we are ready to open the call for questions. Matt, please provide the appropriate instructions.

[Matt Glover]

[Operator Instructions] David, what was the recurring revenue for the quarter? How much of that was from subscriptions versus maintenance?

[David Traverse, executive]

Thanks, Matt. Recurring revenue for the quarter was $2.2 million with $1.8 million of that coming from maintenance and the rest of that from our subscription-based revenue.

[Matt Glover]

Thanks, David. Apart from the gaming space, what other markets on the commercial side are you seeing increased interest in?

[Craig Herman, executive]

Sure. Thanks, Matt. We are seeing a lot of opportunity in online gambling, education, workforce management, health care and financial services. As we talked about in the past, we're continuing to leverage our government relationships to gain market share in new geographies and expand our commercial use cases.

An example of this is leveraging our strong foundation in the Turkey financial sector. We've been able to streamline our breakthrough into North Africa. And so this has really accelerated our expansion in the Middle East.

[Matt Glover]

Thanks, Craig. David, another one for you. With a strong balance sheet, what are your capital allocation plans?

[David Traverse, executive]

Yes. We ended the quarter with $27.5 million in cash, cash equivalents and marketable securities and no debt. We're continuing to capitalize on the higher interest rates as well as our previously announced share repurchase program.

Moving into the remainder of 2023 and then 2024, we're maintaining -- our goal is to maintain a robust cash position that will enable us to evaluate strategic opportunities with potential to maximize shareholder value and drive scale.

[Matt Glover]

Bob, a question for you. Can you give some color as to why you chose to appoint a Principal Financial Officer as opposed to a Chief Financial Officer?

[Robert Eckel, executive]

Sure, Matt. Obviously, this is not a traditional management structure for most public companies. But I feel and we feel that it aligns well with our current organizational scale, also our needs and it -- well with our cost optimization initiatives that we have going on. So promoting David to Principal Financial Officer allows us to reduce costs without compromising our ability to achieve our financial and operational goals. And also having streamlined financial team aligns with our strategic growth and cash plans. And I'll say it again, David has done a fantastic job as our Corporate Controller over the past 3 years, and we feel he's the right person for the position.

[Matt Glover]

I'm going to combine a couple of questions here. We've received some questions looking for more details around Dave Barcelo's departure, specifically if severance is owed and if any violations, legal proceedings or items of consequence transpired or are pending.

[David Traverse, executive]

I'll take that one. Dave Barcelo's departure from the company is not the result of any dispute or disagreement on any matter. As Bob mentioned earlier, we are thankful for all of Dave's leadership during these past 3 years. We do anticipate incurring some onetime severance costs, which will be reflected in our Q4 and full year 2023 results. However, we still remain on track to exit the year with due to operating cash flow.

[Matt Glover]

Thanks, David. A question for Craig. Over the past couple of quarters, you've announced a few product enhancements. How are you picturing the evolution of Aware's technology?

[Craig Herman, executive]

Sure. Aware's technology is primarily driven by our ability to both predict and adapt to the market's needs. Right now, we are focused on 3 trends in this market: the first being increased adoption of cloud-based solutions; two, cross-platform mobile support; and finally, greater interest in deep learning and AI.

By focusing on these 3 areas, we can tailor our technology to be easily and rapidly deployable for any emerging use case or changes in the market. Following the pandemic, digital crime became more advanced and widespread.

[Matt Glover]

Thanks, Craig. Another one for you. You've mentioned in previous calls that you're focused on growing the commercial side of the business. What progress have you made.

[Craig Herman, executive]

Yes. So as we talked about earlier, Aware's strong reputation in the government space has been generating momentum for the company on the commercial side. The confidence government agencies, especially those in larger governments like the U.S. and Europe, have in our technology is starting conversations with larger, more recognizable brands, which we can then leverage to accelerate our breakthrough into the commercial space.

[Matt Glover]

Next question, Bob, there was a significant improvement in operating cash flow compared to last year. What drove this?

[Robert Eckel, executive]

Well, thanks, Matt. I think this improvement in cash flow really, it boils down to our persistent execution of our growth strategy and our cost structure optimization efforts. We've been working on optimizing our costs, as you know. And we continue to ramp adoption for all the solutions and really driving for a leaner operational model.

Through our recent product enhancements Craig was talking about earlier and we've been talking about in the press releases, with the launch of our formal partnership ecosystem, we've really expanded our technologies use cases and made it more accessible to more of the population. So the upgrades we rolled out this year to Knomi and AwareID enabled our partners and sales team to go to market with more versatile, secure, easy-to-use solutions, and that resulted in increased sales and upselling.

Additionally, the view of our formal partner ecosystem and pricing tiers now allows organizations of all sizes from start-ups to global enterprises to adopt Aware's technology. And lastly, our partnership program really maximize the potential reach of our current and future partnerships without significantly increasing our go-to-market costs.

[Matt Glover]

Thanks, Bob. Our next question, Aware spoke with the CIO of Banco Deceval at Identity Week America last month. How has the partnership evolved over the years? And what impact has the relationship had in terms of other opportunities for Aware?

[Craig Herman, executive]

Sure. Bank of Deceval, it was one of the pioneers in the Brazilian financial sector. To incorporate biometrics and has for the past 7 years, they used Knomi to validate account access and credit applications for their customers. Since deploying Knomi, the bank has had very low levels of fraud even with the number of transactions increasing nearly tenfold in the last 5 years and the recent evolution of criminal activity.

Digital crime has become more advanced and widespread throughout Brazil as technology became an integral part of everyday life. This increase in online fraud and digitization has created opportunities for Aware to gain market share in sectors like e-commerce, sporting events, et cetera.

Moreover, Aware's success to warding a new malware designed to attack banks like Banco Deceval could translate into additional opportunities within the global financial sector as the software is now being exported to the United States and Europe.

For anyone that's interested, you can watch the interview between our Lat Am General Manager and the Banko Deceval CIO on Aware's YouTube channel. In fact, I would recommend checking out our YouTube channel. We continue to build on it and is a big piece of our focus from a marketing perspective as we continue to build out different ways to message our audiences and our prospects.

[Matt Glover]

What kind of feedback are you receiving from customers regarding AwareID or your other solutions?

[Craig Herman, executive]

Sure. The feedback from our clients around AwareID, very focused on 2 things: the ease of use and the breadth of the offering. On the heels of our latest release, customers and prospects are using AwareID to replace multiple technologies and improve the user experience in their app or online presence.

The addition of documentation, authentication with Ping Edge AI-driven face liveness is delivering a better, more secure user experience. The speed of deployment has gone from months to days so that customers can deploy, test and iterate with very little assist and/or developer resources.

[Matt Glover]

David, a question for you. Why was the company not more aggressive in buying back -- in its buyback program?

[David Traverse, executive]

Yes. Thanks, Matt. So as I mentioned earlier, we do believe in buying back our stock and can be attractive use of capital. However, we are limited based on Nasdaq rules of how much we can buy back based on historical trading volumes.

[Matt Glover]

Thanks, David. At this time, this concludes our question-and-answer session. If your question wasn't answered, please e-mail Aware's IR team at [e-mail].

I'd now like to turn the call back over to Bob for closing remarks.

[Robert Eckel, executive]

Yes. I'd like to thank all of you for joining today's call and also, of course, thank our employees, partners, shareholders for the continued support that they provide us. And as a reminder, you may learn more 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.

Matt, 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 today for Aware's Third Quarter 2023 Conference Call. You may now disconnect.