Aware, Inc. (AWRE) CEO Robert Eckel On Q3 2021 Results - Earnings Call Transcript

Oct. 26, 2021 6:30 PM ETAware, Inc. (AWRE)
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Aware, Inc. (NASDAQ:AWRE) Q3 2021 Earnings Conference Call October 26, 2021 5:00 PM ET

Company Participants

Matt Glover - Investor Relations

Robert Eckel - President and Chief Executive Officer

David Barcelo - Chief Financial Officer

Conference Call Participants

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Matt Glover

00:08 Good afternoon, and welcome to Aware’s Third Quarter Twenty Twenty One Earnings Conference Call. Joining us today is the company’s CEO and President, Robert Eckel; and CFO, David Barcelo. Following their remarks, we will open the call for questions. If you would like to submit a question you can do so at any time using the built-in ask a question feature in the webcast player.

00:26 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.

00:40 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 their factors that could cause actual results to differ materially from the 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 and quarterly reports on Form 10-Q.

01:10 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 by applicable securities laws.

01:33 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.

01:49 Accordingly, Aware has provided a reconciliation of these non-GAAP financial measures to the most direct 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.

02:05 Now, I’d like to turn the call over to Aware’s CEO and President, Bob Eckel. Bob?

Robert Eckel

02:11 Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we issued a press release, announcing our results for the third quarter ending September thirtieth, twenty twenty-one. A copy of the press release is available in the Investor Relations section of our website.

02:33 Today, I plan to discuss the progress we made in the third quarter and why we are looking forward to what is ahead. After I provide a high-level overview of this quarter's operational results, our CFO, David Barcelo will review more details on the financial results for the quarter. Afterwards, I'll discuss the opportunities on the horizon, and then we open the call for questions.

02:57 At high level, during the third quarter, we continue to make strong progress in building our sales pipeline and securing new partnerships. We were able to upgrade certain customers to long-term commitments based on our confidence level in our suite of products. We expanded our presence in Europe and Latin America by adding new customers and renewing commitments with the existing customers.

03:19 Our OEM revenue, where our SDKs are built into hardware providers has also rebounded from last year. As a result, our sales and operational traction enabled us to generate approximately seventy percent year-over-year revenue growth. In addition, our revenue for the first nine months of twenty twenty one exceeded our total revenue for all of twenty twenty by approximately fourteen percent already.

03:45 Our impressive growth rates serve as a proof point to the effectiveness of our strategy. And this is positioned Aware for continued success in the years ahead. Q3 marked the fifth consecutive quarter of record Knomi transactions. We recorded more than twelve million transactions protected by Knomi, bringing the total for twenty twenty one to thirty one million dollars compared to eleven million dollars in all of twenty twenty.

04:13 These remarkable numbers are a testament to the growing adoption of biometrics and the value proposition offered by Knomi. During the third quarter, we highlighted the ability of Knomi to meet the high demand for touchless authentication solutions in the wake of the COVID-19 pandemic. Mentioning even more used cases for this trusted platform, we expect this increasing number of Knomi transactions to convert to a stable growing revenue stream as subscription customers begin to record transactions beyond their contract minimums.

04:49 We are becoming increasingly well recognized by biometrics industry at large because unlike others who offer point solutions or a single modality for specific applications, we can provide multi-modal, multi-function applications at interface with all kinds of devices, systems and hardware via our biometric middleware.

05:12 This quarter, we are able to demonstrate our expertise in-person at demonstrations at Connect ID, Identity Week London and the International Association for Identifications annual conference. Our team was excited to get back in person to engage directly with customers and prospects and we are gaining additional traction from these events. Moreover, we continue to build our thought leadership position in biometrics and digital identity. Our team published several articles and industry trade publications and was recognizing “in multiple articles as well”. As we continue to build our profile, we have looked to increase the number of companies that we partnered with, so we can expand our reach in existing verticals and broaden in our new reach.

05:59 Before I continue, I'll turn it over the Dave who walk us through our financial results for the quarter.

David Barcelo

06:08 Thank you, Bob, and good afternoon to everyone on the call. Let's turn to our financial results for the third quarter ended September thirtieth twenty twenty one. Our total revenue in the third quarter was four point two million dollars essentially flat from the prior quarter and up sixty nine percent from two point five million dollars in the same year ago period.

06:30 For the nine months ended September thirty twenty twenty one, our total revenue increased sixty three percent to twelve point nine million dollars from seven point nine million dollars in the same year ago period. The increase in revenue was primarily due to higher software license sales from our fixed-fee contracts, as well as an increased subscription based revenue related to growing transaction volume from existing customers and upfront recognition of fixed minimum transactions from new international wins.

07:01 With regards to our operating expenses, the third quarter of twenty twenty one, our operating expenses increased fifteen percent to five point eight million dollars from five million dollars in Q3 of last year. For the nine months ended September 30th, our operating expenses increased thirteen percent to seventeen point four million dollars from fifteen point five million dollars in the same year ago period.

07:24 The quarterly and nine month period increases in operating expenses were due primarily to sales and marketing resources acquired in our AFIX acquisition, as well as an increase in stock based compensation expense and investments in IT infrastructure. The corresponding operating loss for the third quarter of twenty twenty one was negative one point six million dollars and improvement from an operating loss of two point five million dollars in the same year ago period. The year-over-year decrease in operating loss was primarily due to the aforementioned increase in revenue.

08:03 Operating loss for the nine months ended September thirtieth was four point six million dollars compared to an operating loss of seven point six million dollars in the prior year period. The decrease in operating loss was primarily the result of increased revenues. For the third quarter of twenty twenty one, GAAP net loss totaled one point six million dollars or zero point zero seven dollars per diluted share compared to a GAAP net loss of one point eight million dollars or zero point zero eight dollars per diluted share in the same year ago period. GAAP net loss for the nine months ended September thirtieth totaled four point six million dollars or zero point two one dollars per diluted share. Compared to a GAAP net loss of six million dollars or zero point two eight dollars per diluted share in the prior year period.

08:48 Our adjusted EBITDA loss for the quarter, which we reconcile in our earnings release totaled one million dollars. This compared to adjusted EBITDA loss of two point one million dollars in the same year ago period. For the nine months ended September thirty, adjusted EBITDA loss totaled three million dollars, this compared to adjusted EBITDA loss was six point six million dollars in the prior year period.

09:13 On the balance sheet, we had thirty three point three million dollars in cash and cash equivalents at the end of the quarter compared to thirty eight point six million dollars as of December thirty one twenty twenty. The nine-month period, the use of cash was primarily for operations. Aware continues to maintain a strong and strategic cash position as we explore strategic investment opportunities both internally and externally to capitalize on the macro biometric trends and our long-term vision.

09:47 Organically, we have seen significant growth from Knomi subscription accounts. As Bob mentioned, we have recorded twelve million transactions protected by Knomi in the third quarter alone, bringing our nine month total to more than thirty one million transactions. This compares to eleven million transactions in all of twenty twenty. The growing volumes tested the strength and scalability of this product line and this success is paving the way for future growth as new customers onboard based on the recommendations of our current customer base.

10:20 This completes my financial summary. Now, I'd like to turn the call back to Bob for additional insights on our operational progress in Q3. Key initiatives and priorities for the remainder of twenty twenty one and beyond. Bob?

Robert Eckel

10:34 Thanks, Dave. As I mentioned in my opening remarks, we are continuing to build a strong sales pipeline and sign new partnerships. One way we've done this is by capitalizing on strength of our existing customer base and extending our engagements into longer term commitments. For example, in Latin America, one of our stronger regions for Knomi, we grew our presence there in the third quarter by adding new customers, renewing commitments with existing customers some of which are deploying Knomi to additional branches of their organizations.

11:08 The Latin America market has readily adopted biometrics, particularly in the financial services sector. And as a consequence, Knomi has grown rapidly, proving its merit and verifying identities and preventing fraud. In addition to Latin America market, we have partners integrating Knomi in the United States, Emea and Asia.

11:29 Speaking of our partner base, one of our key objectives in twenty twenty one is to add partners and integrated resellers to grow our scale and expand our revenue opportunities. This quarter, we expanded a partnership with a leading cybersecurity solutions provider so that our technology is now integrated into two of their product lines instead of one.

11:50 We signed another significant partner that will integrate our three core offerings, Knomi, ABIS, and BioSP into their solution and deploy in a critical government application. As we've discussed on prior calls, we see a fit for biometrics in any use case where trusted transaction are important. Partners are key for us to expand in a different regions and sectors to accelerate our growth. So we're very pleased with the progress we've seen on the partnership side this quarter. OEM revenue where [Indiscernible] built into hardware for providers has significantly increased from last year's levels. During the pandemic, our OEM partners faced considerable headwinds which have now started to dissipate.

12:38 Now, we are seeing growth in this category, diversifying our revenue streams and further validating our products strategy. Our services mix has also been a plus. We successfully completed a major U. S. Federal Government program, I had a schedule in below budget and we'll be transitioning to add on sales in the coming quarters as it gets adopted by agencies across the country. Providing, he had another source of recurring revenue to the company.

13:06 In terms of our financial performance, this quarter's numbers are characterized by high quality, more predictable annual revenue and steady operating expenses, which demonstrates the leverage in our business model. As we continue to ramp up the subscription side of the business, some of the revenue lumpiness that we have seen will diminish as the minimum contract lumpsum, recognitions will now represent a decreasing proportion of our total revenues when compared to the recurring revenue base.

13:36 Regarding costs, we have maintained our operating expense level relatively flat for several quarters and are not expecting any significant increases in expenses in the near term. We continue to optimize our operational investments and are comfortable with the business model we have currently in place. With regards to our corporate development activity, we remain actively engaged evaluating strategic opportunities both organically and inorganically. Is important to note that valuations are quite elevated at the moment, causing us to spend more resources to identify targets to fit our criteria for the business transformation previously laid out. As we evaluate opportunities when you want to ensure we are staying in line with our strategy and being prudent with our capital.

14:22 To wrap up, twenty twenty one has been an important year for where. Biometric enablement has quickly becoming a standard in many industry verticals and across many geographies. We believe that the multi-prolonged transformation strategy and implementation that we put in place is coming to fruition.

14:40 We have the product portfolio, the sales pipeline and the growth strategy to build on our leadership in the industry. The momentum in the business is very positive, and we remain confident in our ability to deliver solid results as we work towards the end of the fiscal year and into twenty twenty two. All of us are aware excited about what is ahead and we are grateful for your support as he navigated together.

15:04 With that, we are ready to open the call for questions. Matt, please provide the appropriate instructions.

Question-and-Answer Session

Matt Glover

15:16 Thank you, Bob. As a reminder, you can submit a question using the built-in ask a question feature in the webcast player. Please hold while we populate the questions.

Matt Glover

15:25 Okay, Bob, this first question is for you. How is the macro environment affecting Aware?

Robert Eckel

15:31 Well, a couple of things. Certainly, we can take macro environment versus and most critical thing. It comes to mind is recovering from our global pandemic. And then but most of the headwinds that are caused by the COVID-19, we've been starting to see them subside a little bit in our industry. But I don't think anyone would go so far say it's over.

15:57 One thing I do have to say is the reintroduction of the in-person events, like I mentioned in my remarks. Highlighted a level of excitement both from our internal team and from our customers and prospects and people soon to be interesting it back out there, conduct business in-person and outside the trade shows, business travel has also begun to pick up and with more and more customers starting to accept the in-person meetings, which also helps us.

16:24 But that said, it's not without all challenges and the pandemic is still havoc on our face to face selling. Networking and relationship cultivation that we historically relied on it Aware. And trying to get facetime with these clients that aren't back in the office is also hard. And in those parts of the world, there's still significant restrictions as we're realizing. But we certainly improved our capability have effective digital meetings during the course of the pandemic. But the fact remains at facetime where the prospect can really make a meaningful impact on the length of the sales cycle and shorting it.

Matt Glover

17:09 Thanks, Bob. Our next question when can shareholders expect that the company will again become consistently profitable on a GAAP basis. Is this a reasonable short-term, medium-term or long term expectation? Thanks.

David Barcelo

17:27 Thanks. I will say we do not provide forward looking estimates. However, it is notable that our GAAP net loss improved by well over a one million dollars about one point four million dollars year-to-date compared to last year, so we are certainly trending towards profitability.

Matt Glover

17:46 Thanks, Dave. Our next question has there been any early feedback on the formal SaaS offering that was slated for this fall?

Robert Eckel

17:56 Thanks, Matt. So at the stage, what I could tell you is that we're being very methodical about the new offering and we're testing it in our assumptions along the way with various customers, but we're pretty bullish on the impact that this will have unaware and frankly, we're just continuing to push forward in a world where you will own your identity. So purpose behind our deliberate approach is to ensure that we have the structure and all the fulfillment capability and processes in place to make these necessary adjustments and deliver value.

18:32 And providing value for our customers is the forefront of all of activity. So we want to make sure as we roll it out, we can fulfill and also support their needs from an integration perspective as well as a ongoing support.

Matt Glover

18:51 Thanks, Bob. A few questions were asked around the potential sale of the building instead of asking them individually please provide an update on the topic?

David Barcelo

19:00 Yes, Of course, Matt. So earlier this year you may recall we hear that we received an unsolicited request from a developer that wanted to purchase our building in Bedford. The developer then submitted our building is part of an offer that was a bid on a government project. That project included a massive overhaul of our office building in order to fit the requirements of this this government customer as you can imagine very strict security and other requirements and so in prior earnings call, we noted that this process is uncertain, the timeline is uncertain and there was quite a lot that need to happen in an order for this yield to go through. I can't confirm now that the bid was submitted on time. The process is still running, we are waiting to hear and we have not yet received notification of an award. The original P&S that we signed had a six month window to notify on the award and move to closing. We have since extended that window as the government process has drawn out and we expect to hear one way or another before the end of the year.

20:18 Nevertheless along the way we've been evaluating our leasing options and we do expect to remain cost neutral with regards to our operating expenses compared – the building compared to a new lease and we will certainly benefit from that extra capital expenditures that we anticipated with our aging building. It is important to keep in mind that there's no guarantees we'll reach closing on this P&S that we signed. If we do proceed with the sales all the details will be disclosed in line with regulation set forth by SEC.

Matt Glover

20:58 Thanks, Dave. Next question is who are some of the company's key competitors?

Robert Eckel

21:05 You want me to answer that or did you ask, Dave? So I think I should answer that Matt. So I think what we talked about clearly our providers like Idemia, Thales and NEC and then component providers that offer biometric software and harder components for our fingerprint and base our companies like Facetec, Dermalog, and Innovatrics.

Matt Glover

21:35 Thanks, Bob. What was the subscription revenue in the quarter and how much of that was upfront recognition of annual minimums?

David Barcelo

21:44 Good question. I believe Bob spoke to the subscription revenue a little bit in his section. But specifically, we hit one point one million dollars in the third quarter. And if you look at the quarter over quarter increase from Q2 to Q3, the delta, they’re largely represents the contractual minimums that was asked about and this increase will continue to incur anytime. We extend contracts or we have new wins. We'll note also that with regards to our transaction volumes, we do not count the minimum committed transactions. At the time of signing, but rather we count those transactions as they occur. So our transaction volumes are a good measure of the continued business and the revenue is based off of our accounting measures. And therefore, we have this kind of shift in timing, which could lead to misleading comparisons of revenue per transaction.

Matt Glover

22:57 Thanks, Dave. I think the next for you to a clarification. Knomi transaction significantly slowing on a quarter over quarter basis for prior quarter, what drove this deceleration in Knomi transactions?

David Barcelo

23:08 Well, I'm happy to report Matt, that there was no deceleration but let me clarify our transaction counts. We've seen a really nice increase actually the first quarter of twenty twenty one, we had roughly eight million dollars, a little bit more than eight million dollars worth of Knomi transactions as we progress the second quarter rose to ten million dollars and here in the third quarter, we eclipsed twelve million dollars and so we've been seeing a nice steady increase quarter-over-quarter.

Matt Glover

23:41 Great, thanks. Next question is what would you view as success over the next few years?

Robert Eckel

23:51 Well success over the next few years is continue to onboard new Knomi customers, as well as expand our total platform portfolio and expand in our SaaS launch offering. So that we're increasing and creating a very steady base of recurring revenue. So that's I mean, getting to the stage that it's less lumpy, but recurring. I think, I mentioned and Dave mentioned also, we're getting our customers are signed up for longer periods versus just the shorter term or perpetual license?

Matt Glover

24:36 Thanks, Bob. You mentioned OEM revenue has rebounded significantly from last year. Can you provide any additional detail around this?

David Barcelo

24:47 Yeah, Sure. Let me…

Robert Eckel

24:48 Do you want to take that?

David Barcelo

24:49 Yeah, yeah. Thanks, Bob. So when I said a significant rebound, I mean, our growth seen in this area exceeded ten percent or anytime we talk about significant typically about ten percent and for our OEM partners and our revenue growth here, we were well in excess of ten percent and by that what I mean is that our hardware vendors that embed software so our Aware software into their products, which is often the case for live scans and civil and criminal fingerprinting. That makes up our OEM revenue stream. And while we don't breakout this revenue stream or this level of detail publicly, I can share that we're very pleased with the direction of our OEM revenues and it highlights the impacts of our efforts to kind of cultivate these partnerships and leverage those agreements to expand our reach into the market.

Matt Glover

26:01 Thanks, Dave. At this time, this concludes our question-and-answer session if your question was answered, please email where's IR at I'd like to now turn it over to Bob for closing remarks.

Robert Eckel

26:15 Thank you, Matt. And I want to thank everyone for joining us on today's call. I'd like to remind you about the investor presentation available on our website, if you haven't already downloaded, I invite you to do so and learn more about our overall strategy, I'd also like to thank our employees, our partners, our investors once again for the continued support, and we look forward to updating you on our next call, Matt?

Matt Glover

26:41 Thanks, Bob. Recording of today's call will be available for replay via link in the Investor Relations section of the company's website. Thank you for joining today for Aware’s third quarter twenty twenty one earnings conference call. You may now disconnect.

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