Aware Inc (AWRE) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to Aware's second-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'll open the call for questions. (Conference 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 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 the term is defined by the SEC in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

Accordingly, Aware has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure in the company's earnings release issued today.

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

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

Thanks, Matt, and good afternoon, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ending June 30, 2021. Copy of the press release is available in the Investor Relations section of our website.

On our third earnings call together, I am proud to report that we're continuing to see the initial impacts of the restructuring that we began just over 18 months ago. I'm thankful for the opportunity to address all of you and reiterate why we believe Aware is poised for rapid growth in the coming years.

Today, I plan to discuss the progress we've made throughout the second quarter and why we're looking forward to what is ahead. On this call, I'll provide you with a high-level overview of this quarter's operational results. I will then turn it over to our CFO, Dave Barcelo, to review more of the details on the financial results for the quarter, and then take some time to discuss what we have on the near- and long-term horizons. After that, we will open the call for your questions.

In the second quarter of 2021, we made several key advancements on ongoing initiatives that have and will prepare us well for our future. One of the most notable is the successful integration of the AFIX product line which we acquired in November of last year. Financially, we are seeing an immediate topline uplift which will pay for itself in a relatively short time span.

This quarter also marks the fourth consecutive quarter of record Knomi transactions with more than 18 million transactions in the first half compared to 11 million in all of 2020. We're already at five times the number of transactions in the first half of 2020. As our transformation continues and subscription customers begin to record transactions beyond contract minimums, we expect these to convert to a stable, growing revenue stream.

More and more government agencies and subject matter experts are paying attention to our unique value proposition. This is evidenced by a considerably large and growing pipeline and base. Unlike some others in the biometric space who offer point solutions or a single modality for specific applications, we can provide multimodal, multifunction applications that interface with all kinds of devices, systems, and hardware via our biometric middleware. This advantage enables us to compete and effectively beat entry-level and single-offering players in the market.

On the other end of the spectrum, there are identity leaders competing for complex programs and deliveries that require a full suite of hardware and an integrated software solution. While we are not a systems integrator and therefore do not directly bid for these large-scale projects, we can and do partner with many of these leaders and others to provide our [hardened] proven software as requested. Our unique approach to biometrically accessibility, complemented by our core offerings, provides us exposure to customers of all size in all geographies.

I'm looking forward to talking about what lies ahead on the horizon in a little bit. But for now, I'll turn it over to Dave Barcelo who will walk us through our financial results for the quarter.

Dave, over to you.

Thank you, Bob. Good afternoon to everyone on the call. Let's turn our attention to the financial results for the second quarter ended June 30, 2021. Our total revenue in the second quarter was up 2.3 times the same year-ago period, $4.3 million, up from $1.9 million in 2020. This compares to revenue of $4.4 million in the first quarter.

Year to date, for the six months ended June 30, 2021, our total revenue increased 61% to $8.7 million, up from $5.4 million in the same year-ago period. The increase in revenue was primarily due to increased subscription-based revenue from growing transaction volume with existing customers, and the upfront recognition of fixed minimum transaction amounts from two new international wins.

With regards to our operating expenses, for the second quarter of 2021, our operating expenses increased 4% to $5.8 million from $5.6 million in Q2 of last year. For the six months ended June 30, 2021, our operating expenses increased 12% to $11.7 million from $10.5 million in the same year-ago period. The quarterly and six-month period increases were due primarily to sales and marketing resources acquired in our AFIX acquisition.

Corresponding operating loss from the second quarter of 2021 was negative $1.5 million compared to an operating loss of negative $3.7 million in the same year-ago period, an improvement of 58% over last year. The year-over-year decrease in operating loss resulted primarily from the aforementioned increase in revenue.

Operating loss for the six months ended June 30, 2021, was negative $3 million compared to an operating loss of negative $5 million in the prior year period. The decrease in operating loss was primarily the result of increased revenues.

For the second quarter of 2021, GAAP net loss totaled negative $1.5 million or negative $0.07 per diluted share compared to a GAAP net loss of negative $3.1 million or negative $0.15 per diluted share in the same year-ago period.

GAAP net loss for the six months ended June 30, 2021, totaled negative $3 million or negative $0.14 per diluted share compared to a GAAP net loss of negative $4.2 million or negative $0.20 per diluted share in the prior-year period.

Our adjusted EBITDA loss for the quarter, which we reconciled in our earnings release, totaled negative $900,000. This compares to an adjusted EBITDA loss of negative $3.3 million in the same year-ago period.

For the six months ended June 30, 2021, adjusted EBITDA loss totaled negative $2 million compared to an adjusted EBITDA loss of negative $4.5 million in the prior-year period.

On the balance sheet, we had $35.2 million in cash and cash equivalents at the end of the quarter compared to $38.6 million as of December 31, 2020. For the six-month period, the use of cash was primarily from operations. Aware maintains a strong and strategic cash position that enables us to allocate capital to high ROI opportunities as they present themselves. We're actively evaluating opportunities to ensure that we're making strategic investments to realize growth and scale as an organization.

Organically, we have seen significant growth from our Knomi subscription accounts. We recorded more than 18 million transactions in the first half, which is five times the number of recorded transactions in the first half of 2020. This is compared to 11 million in all of 2020. The growing volumes attest to the strength and scalability of this product line. And the 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, our key initiatives, and our priorities in 2021 and beyond.

Bob?

Thanks, Dave. Last year, when we began ramping up our diligence on acquisition targets, we were particularly looking for opportunities that would be both immediately accretive and synergistic with our business transformation. AFIX, which provides turnkey face and fingerprint biometric matching and forensic analysis software for small- to medium-sized law enforcement and government agencies, fit those criteria.

In addition to accelerating and securing our future expansion at the law enforcement and civil ID, the introduction and use of Aware's facial recognition software in the AFIX products provides an extra layer of validation and authority that is essential for bringing new accounts into the sales funnel and converting them into customers. Simply put, our purchase of AFIX gives us the ability to grow and serve a much more diverse customer base, whether they're looking for smaller solutions or larger enterprise solution implementations that can scale to millions of identities and records.

We have jointly recognized operational cost savings, development savings, and most importantly, an even better a AFIX product to help law enforcement serve and protect their communities.

Now that we have completely integrated AFIX's products, people, and culture into ours, we are already making traction in business development. And once Aware's facial recognition software powers the AFIX system, we will achieve higher performance at a lower cost with a comprehensive service.

We are happy to report post-integration that the customer retention rate remains upward of 90% and mirrors our core retention profile. In fact, customers are doubling down on previous commitments, contemplating addition of Aware's facial recognition and additional modalities that are now available to them.

The connectivity and compatibility of AFIX with our ABIS offering will allow counties or municipalities to scale and connect with other agencies. They would be able to use all the same tools that they've been using as existing customers, but now with premium service and unprecedented interconnectedness, made possible by our middleware. This kind of investigative ability will allow agencies to be more self-reliant, while at the same time providing assistance to other law enforcement departments in the area.

With AFIX under our wing and part of our portfolio, we have also experienced remarkably positive second-order effects that will ultimately play a transformational role in bolstering our top line. By acquiring the AFIX customer book of business, we have developed a strong lever through which we are able to address bids for much larger projects.

Our association with AFIX has provided us with the references based in more than 500 sites across the US and in more than 25 countries. Some prospects who were looking to solve problems that our core offerings address would not entertain our bids without the street cred that these references provided. Now we have increased our access to a larger set of opportunities that are much higher value.

With each new connection via AFIX, we increased the likelihood of winning these adjacent opportunities. At just over halfway through the year, we have a line of sight into a number of these deals and are working diligently to secure them.

For these reasons, the AFIX acquisition is exemplary of how we want integrations to go. The team is ready and skilled in this area. It's also an excellent case study that speaks to the effectiveness of a hybrid organic and inorganic growth strategy.

As Dave said earlier, we are in a strong financial position and are looking to deploy capital to the highest-value, inorganic opportunities. To that end, we have identified additional opportunities that we believe meet our criteria. Though we do not have any updates to report at this time, we are continuing to actively monitor and review the space and ramp up our diligence.

Turning to our financial performance, we are encouraged by the more than doubling of our Q2 top line from last year. Though we are still in an early stage of removing the lumpiness associated with term and the legacy perpetual license model, it's clear that we are on a longer-term trajectory that's trending upwards. As we continue to ramp up the subscription side of our business, our model tells us that some of this lumpiness will more or less fade away as the lump sum minimum contract recognitions represent a smaller proportion of total revenues than a recurring revenue base.

We've also begun to see initial expansion in our installed base, with existing customers leveraging our product portfolio for more use cases and/or adding modalities to address additional applications of our technology. In the prior two calls, I described the importance of working with partners to provide us exposure to new verticals and to expand our reach in existing verticals.

Last month, we successfully leveraged a technology partnership with Imprivata to enter the healthcare space, which at this time is red hot. While the global facial recognition technology market at large is anticipated to grow at a CAGR of 23%, the healthcare biometric market beats that at a CAGR of 24.2%. It's an exciting place to be. And with a record number of revolutionary healthtech firms working on disruptive technology, there's room for us to grow.

We see a fit for biometrics in any use case where trusted transactions are important, and healthcare is no exception. With biometric enablement quickly becoming the future of business, travel, healthcare, and our general livelihoods, we recognize the added pressure on software providers like us to protect data and maintain the privacy of our users.

That responsibility to our users has always been a core pillar of our business. As we navigate our ramp up, we're taking actionable steps to continue addressing these issues directly so our users can own their identities.

We took one of these steps back in February when we announced the appointment of Gary Evee to the Board of Directors. With more than 25 years of IT experience, he brings a deep domain knowledge and directly applicable cybersecurity expertise to Aware.

Internally, we're also onboarding critical leadership and support staff to identify areas of focus as we work to build a proactive plan to mitigate risk and deliver a high-quality assurance to our customers. This is a pivotal moment for Aware. The first-hand validation of our organic and inorganic hybrid growth strategy, alongside a growing pipeline, we have a great deal of optimism for our future and outlook.

We are looking forward to the rest of the year and believe that a multipronged transformation strategy and implementation that we rolled out during our first call in February has begun to materialize and is in full swing. 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.

Thank you, Bob. (Conference Instructions)

First question is: can you elaborate on the scope of business opportunities resulting in the AFIX acquisition? You mentioned bids being reviewed that wouldn't have been without the street cred of AFIX. What you mean by that?

Bob?

Thanks, Matt. Well, the global law enforcement software market is over $10 billion, and the acquisition of AFIX provided Aware with a strong customer base of over 180 agencies to enable us to grow our market share and sell both AFIX and the Aware ABIS products. So by combining both of the product families and leveraging the expertise of the AFIX team, we're able to serve the ABIS needs in both large, small, and medium addressable markets, which is estimated around a couple of hundred million.

But prior to the AFIX acquisition, we wouldn't get a shot at presenting our solution because of basic reference requirements of the tenders. So we had to describe active deployments, customer references. And with the AFIX fully integrated into the ABIS family, we're able to lean on those deployments -- and we call them street cred, to continue and use the same word -- it passes the initial gatekeeping round of reviews.

So once we're past the gatekeeper, we've been able to highlight how valuable AwareABIS is, and we are in active discussions around potential deployments of the offering. So it's helped us a lot, get us in the door in a bunch, and then it's also helping us expand in that area as well.

Great. Thanks, Bob. Venture capital dollars have poured into biometrics. How does Aware intend to compete with these new competitors?

Okay. Well, that's a great question. Thanks for asking. Let me kind of step back a little bit and put it into the competitors that we are really looking at. So the bigger players in the end-to-end identity providers, like the large companies that are well established and have established solutions and market share, that's category 1. Then you got the point solution or the use case providers, 2; and then the new entrants and small companies.

And so what we see or what we're seeing is a lot of private equity and venture investing in the last two areas. And as we monitor the market, we're seeing new entrants or small companies falling into one of three areas. And this is where we compete differently is the use case specific entrant, so that's a company that identifies a particular problem, focus, develops a specific purpose using biometric technology.

Then you got a couple of other companies that are entering focus on vertical markets. They pick a specific or a single vertical, and focus and address as many use cases as they can for biometrics in the vertical.

And then the innovators or inventors, these entrants have a breakthrough or core new technology, very feature focused, and look for ways to commercialize their new technologies. So interestingly enough, these entrants are critical to the growth of the industry and bring useful and new perspectives to it, but they also need time to mature and validate their business models and address risk. It's not easy to take market share from well-established -- or players already in production. And so we have deep production routes along with deep references and credentials as well.

So with that, we look at the competitive pressure of the new entrants to give us some emphasis for continuous breakthrough innovation, along with introducing monetization of that. So we acknowledge they're being resourced by the VCs and are a force to be reckoned with, but they also enable us to help validate the market and the credibility within a market that we're in.

We realize this is a long road to viability of monetizing an idea that comes in. And so these new entrants will be challenged to find the right business model. Do they have the right model? Do they have the right pricing?

We, at Aware, have tested our markets and we've established a good understanding of these challenges. We also manage and evaluate new entrant technology, compare relative to performance, and we have resources dedicated to the research to retain our leadership. But we also have access to voice of the customer through our installed base and through other market research that we do to provide the thought leadership.

And so we focus on an adaptive competitive model. We remain as nimble as possible to compete by adapting to the needs of the marketplace. So a couple -- as we go, we can see there's different modalities and single modalities that come in. And I know this is a long answer, but it is helping to validate our market. Their funding companies in the space suggests that there's good promise.

But we're focused on not just one particular single modality or area, but across the board. And that is helping us, again, secure customers. And in this quarter and in the future, we're expanding the base that we've already established with additional modalities and additional capabilities. I know it's a long answer, but there was a lot to that, but -- so it's a good and it's a bad, but mostly on the good side because it validates the market that we're in and keeps the market churning.

Thanks, Bob. A number of questions were submitted around the potential sale of the building in Bedford. Instead of reading them all individually, Dave, can you provide more color around the potential sale of the building in Bedford and the status to date?

Yes, of course, Matt. So for some time, we have been evaluating our office space and looking to optimize because we've been underutilizing the space that we currently have in our building, which is about 72,000 square feet or so.

And earlier this year, back in January, February, we received two unsolicited offers to purchase the building. So at that point in time, we worked with the broker and we did diligence on both of the companies. We did some diligence on the surrounding area and what buildings we're going for. And we also talked to several companies with sale leaseback (technical difficulty). But at the end, we opted to sell to FDS Bedford.

And then in April, we signed the purchase sale agreement that we posted last quarter. And FDS Bedford then submitted our building as part of a proposal; it was an extensive proposal for government procurement. And that proposal is -- sorry, that procurement is still ongoing, and we await the outcome. And the closing of our P&S will be dependent on an award to FDS Bedford.

So if we get a successful sale of the building, eventually Aware will move to nearby leased space and we're currently checking out options in the neighborhood. We don't plan to move far, with the expectation that we will remain cost neutral. Our operating costs of the new lease space and that of the term building should be roughly similar.

But we, of course, will benefit from mitigating any significant capital expenditures that we see coming down the pipe in the -- in our aging building -- office building. However, there's no guarantee that we reach closing on this P&S because if the FDS Bedford still needs to win the bid. Hope that helps.

Thanks, Dave. Our next question: what was subscription revenue this quarter versus 2Q 2020? And how much of that subscription revenue was the upfront recognition of annual minimums?

Yes. Great question, Matt. So we are now disclosing our subscription revenue in the footnotes of the 10-Q, so you can find the numbers there. Q3 of 2020, we had a bit over $300,000 of subscription revenue. And year to date, we're at $1.1 million. The same year-ago period, we're about a bit over $100,000 in Q2 of 2020, and for the six months period of 2020, it was a bit under $300,000.

At every quarter, we will likely have some amount of our minimum prepayment recognized. But in Q2 of 2021, we were under $50,000.

Thanks, Dave. Our next question, you mentioned inorganic opportunities in the press release. Can you provide more color on the inorganic opportunities you're seeing?

Yes, Matt. I mean, the only thing I'm willing to say or talk about at this time that we're exploring all the options that advance us in the market, so overall in the areas that keep us current and advance. So without getting specific, that's the best I can say at this point.

Thanks, Bob. Next question is: will the company ever consider providing long-term forward guidance?

Dave, you want to take that one?

Sure. At this point in time where we don't anticipate providing long-term guidance, anything is possible. But right now, it's not the case.

Great. Thanks, Dave.

At this time, this concludes our question-and-answer session. If your question wasn't answered, please e-mail Aware's IR team at AWRE@gatewayir.com.

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

Well, I want to thank everyone for joining us on today's call. Also, remind you that you can learn more about our strategy on the investor presentation that's available on our website. And as always, I want to thank our employees, partners, and investors for their continued support, and we look forward to updating you on our next call.

And with that, over to Matt.

Thanks, Bob. I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investor section of the company's website.

Thank you for joining us today for Aware's second-quarter 2021 earnings conference call. You may now disconnect.