Aware Inc (AWRE) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to Aware's Third Quarter 2021 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. (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 the actual results to differ materially from those described.

Listeners should please take note that 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 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.

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.

Additionally, this call contains certain non-GAAP financial measures as that 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?

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 30, 2021. A copy of the press release is available in the Investor Relations section of our website.

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, Dave Barcelo will review more details on the financial results for the quarter. Afterwards, I'll discuss the opportunities on the horizon, and then we'll open the call for questions.

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.

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 70% year-over-year revenue growth. In addition, our revenue for the first nine months of 2021 exceeded our total revenue for all of 2020 by approximately 14% already.

Our impressive growth rates serve as a proof point to the effectiveness of our strategy. And this has positioned Aware for continued success in the years ahead.

Q3 marked the fifth consecutive quarter of record Knomi transactions. We recorded more than 12 million transactions protected by Knomi, bringing the total for 2021 to 31 million compared to 11 million in all of 2020. 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 use 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.

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.

This quarter, we are able to demonstrate our expertise in-person at demonstrations at Connect:ID, Identity Week London and the International Association for Identification's 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 recognized and quoted in multiple articles as well. As we continue to build our profile, we look to increase the number of companies that we partner with, so we can expand our reach in existing verticals and broaden our new reach.

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

Thank you, Bob, and good afternoon to everyone on the call. Let's turn to our financial results for the third quarter ended September 30, 2021. Our total revenue in the third quarter was $4.2 million, essentially flat from the prior quarter and up 69% from $2.5 million in the same year ago period.

For the nine months ended September 30, 2021, our total revenue increased 63% to $12.9 million from $7.9 million 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.

With regards to our operating expenses, the third quarter of 2021, our operating expenses increased 15% to $5.8 million from $5 million in Q3 of last year. For the nine months ended September 30, our operating expenses increased 13% to $17.4 million from $15.5 million in the same year ago period.

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 2021 was negative $1.6 million an improvement from an operating loss of $2.5 million in the same year ago period. The year-over-year decrease in operating loss was primarily due to the aforementioned increase in revenue.

Operating loss for the nine months ended September 30 was negative $4.6 million compared to an operating loss of$7.6 million in the prior year period. The decrease in operating loss was primarily the result of increased revenues.

For the third quarter of 2021, GAAP net loss totaled $1.6 million or $0.07 per diluted share compared to a GAAP net loss of $1.8 million or $0.08 per diluted share in the same year ago period. GAAP net loss for the nine months ended September 30 totaled $4.6 million or $0.21 per diluted share compared to a GAAP net loss of $6 million or $0.28 per diluted share in the prior year period.

Our adjusted EBITDA loss for the quarter, which we reconcile in our earnings release, totaled $1 million. This compared to adjusted EBITDA loss of $2.1 million in the same year ago period. For the nine months ended September 30, adjusted EBITDA loss totaled $3 million, this compared to adjusted EBITDA loss of $6.6 million in the prior year period.

On the balance sheet, we had $33.3 million in cash and cash equivalents at the end of the quarter compared to $38.6 million as of December 31, 2020. 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.

Organically, we have seen significant growth from Knomi subscription accounts. As Bob mentioned, we have recorded 12 million transactions protected by Knomi in the third quarter alone, bringing our nine-month total to more than 31 million transactions. This compares to 11 million transactions in all of 2020. 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.

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 2021 and beyond. Bob?

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 the 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.

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.

Speaking of our partner base, one of our key objectives in 2021 is to add partners and integrated resellers to grow our scale and expand our revenue opportunities. This quarter, we expanded our partnership with a leading cybersecurity solutions provider so that our technology is now integrated into two of their product lines instead of one.

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 transactions are important. Partners are key for us to expand into 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 SDKs are 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. Now we are seeing growth in this category, diversifying our revenue streams and further validating our product strategy.

Our services mix has also been a plus. We successfully completed a major U S. federal government program ahead of schedule and 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 yet another source of recurring revenue to the Company.

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 lump sum recognitions will now represent a decreasing proportion of our total revenues when compared to the recurring revenue base.

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. It's 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, we want to ensure we are staying in line with our strategy and being prudent with our capital.

To wrap up, 2021 has been an important year for Aware. Biometric enablement is 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.

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 2022. All of us at Aware are excited about what is ahead, and we are grateful for your support as we navigate it together.

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

(Operator Instructions) Okay, Bob, this first question is for you. How is the macro environment affecting Aware?

Well, a couple of things. Certainly, we can think macro environment [as the most] critical thing. What comes to mind is recovering from our global pandemic. 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 to say it's over.

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 seem to be interested in getting 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 in-person meetings, which also helps us.

But that said, it's not without its challenges. The pandemic is still wreaking havoc on our face-to-face selling, networking and relationship cultivation that we historically relied on at 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 to 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.

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, Matt. I will say we do not provide forward looking estimates. However, it is notable that our GAAP net loss improved by well over a million, about $1.4 million year-to-date compared to last year. So we are certainly trending towards profitability.

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

Thanks, Matt. So at this 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 on Aware.

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.

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.

Thanks, Bob. A few questions were asked around the potential sale of the building. Instead of asking them individually, can you please provide an update on the topic?

Yes, Of course, Matt. So earlier this year as you may recall, we shared that we received an unsolicited request from a developer that wanted to purchase our building in Bedford. The developer then submitted our building as 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 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 needed to happen in order for this yield to go through.

I can 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.

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.

Thanks, Dave. Next question is who are some of the Company's key competitors?

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 hardware components for fingerprint and face are companies like FaceTag, Dermalog and [Innovaterix].

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

Good question. I believe Bob spoke to the subscription revenue a little bit in his section. But specifically, we hit $1.1 million in the third quarter. And if you look at the quarter-over-quarter increase from Q2 to Q3, the delta there 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.

Thanks, Dave. I think this next one is for you, it's a clarification. Knomi transactions significantly slowed on a quarter-over-quarter basis versus prior quarter. What drove this deceleration in Knomi transactions?

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 2021, we had roughly eight million, a little bit more than eight million worth of Knomi transactions. As we progressed to the second quarter, it rose to 10 million. And here in the third quarter, we eclipse 12 million. So we've been seeing a nice steady increase quarter over quarter.

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

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 to sign up for longer periods versus just the shorter term or perpetual license?

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

Yeah, Sure. Let me --.

Do you want to take that?

Yes, yes. Thanks, Bob. So when I said a significant rebound, I mean, our growth seen in this area exceeded 10% or anytime we talk about significant, it's typically about 10%. And for our OEM partners and our revenue growth here, we were well in excess of 10%.

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.

Thanks, Dave. At this time, this concludes our question-and-answer session. If your question wasn't answered, please email Aware's IR team at awre@gatewayir.com. I'd like to now turn it over to Bob for closing remarks.

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

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 us today for Aware's Third Quarter 2021 Earnings Conference Call. You may now disconnect.