BIO-Key International Inc (BKYI) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the BIO-key International, Inc., first-quarter 2016 conference call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, May 16, 2016.

I would now like to turn the call over to today's host, Scott Mahnken, BIO-key's Vice President of Marketing.

You may begin, sir.

Thank you, Chad.

Good morning, everyone, and thank you for joining us today for our 2016 first-quarter conference call and webcast.

With me this morning are Mike DePasquale, BIO-key's Chairman and Chief Executive Officer, and Ceci Welch, BIO-key's CFO.

I'd like to remind everyone that today's conference call and webcast may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements.

The words estimate, project, intends, expects, believes, and similar expressions are intended to identify forward-looking statements.

Such forward-looking statements are made based on management's beliefs as well as assumptions made by and information currently available to management pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

For a more complete description of these and other risk factors that may affect the future performance of BIO-key International, see Risk Factors in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made.

The Company also undertakes no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made.

At this time I'd like to turn the call over to Mike DePasquale.

Thank you, Scott, and thank you all for joining us today.

I'll give you an overview of highlights that are crucial to understanding where we are as a Company and where we are headed.

Let me first state that for several quarters, and more recently on our year-end call in March, we continued to underscore the potential volatility of our quarterly revenues based on the difficulty of predicting the timing of the medium- and larger-sized deals that we are pursuing.

In fact, there are one or two opportunities in our sights that could have transformed the Q1 performance, and certainly they remain on our probable list for the current quarter -- that's Q2 -- or later in the year.

While it's disappointing to start off the year with a downward revenue comparison, we made solid progress advancing a number of revenue-driving initiatives during the quarter and remain fully confident in our full-year guidance provided just a few weeks ago.

Except in cases of focused ID or authentication solutions for border control, law enforcement, or fraud prevention, biometric authentication represents a component of a larger solution or an application.

Given this dynamic, our path to revenue growth remains heavily focused on partnerships with application providers who incorporate our technology into our broader solution.

For this reason, the timing of a good proportion of our deals progresses largely outside the direct influence of our sales and marketing efforts and control.

We are very active in building our basic partnerships and working to ensure that biometric authentication remains high in their priorities and sales effort.

However, as you can imagine, this partner emphasis makes it much harder for us to handicap the timing and size of deals, given the range of additional factors that are outside our visibility and control.

The good news is we remain in the earlier stages of the broad enterprise engagements of biometrics, and the sales cycles are certainly extended, with customer prospects requiring significant support in the consideration of new modes of authentication security.

As I mentioned, much of our effort during the quarter was advancing longer-term initiatives, such as: the staffing at our team in Hong Kong which is focused on developing the broader market in Asia; the continued development and testing of our mobile payments solution, utilizing the technology that we licensed back in the fourth quarter; expanding our base of distribution partners and channels; and the active sales and marketing of our fingerprint readers within a support from Microsoft Windows 10 operating platforms.

Also, we're building a Center of Excellence in China that will focus on the design, development, manufacturing, and distribution of our advanced hardware and software offerings for mass markets.

This is expected to play a significant role in driving future revenue growth.

To be more specific on a vertical basis, clearly the healthcare industry represents one of the most available markets for biometric deployments and remains a top priority target for us.

A range of federal mandates require healthcare providers to protect the privacy of patient records; and now, as we have mentioned many times, electronic prescriptions are being mandated, along with the use of two-factor authentication.

We believe our biometric solutions offer the most convenient, secure, and cost-effective means to enable compliance.

We are seeing growing recognition and engagement for biometrics in this function and have a number of marquee reference accounts that have been using our technology for some time.

To further develop this market we have selectively forged partnerships with leading healthcare technology solution providers that have extended networks and established healthcare providers across the country.

We're seeing growing benefits from these efforts, such as a modest-sized recent customer win through our strategic partnership with healthcare firm Caradigm.

After several quarters of development, this represents our first new joint customer win, which is always the hardest; but we now anticipate more opportunities to deliver identity and access management solutions to their network of healthcare customers will come up.

We also secured a new contract with a large national healthcare institution through our partnership with HealthCast.

HealthCast creates software authentication and access management solutions for healthcare providers, and we partnered with them to deliver a biometric authentication solution to comply with the electronic prescription of controlled substance regulations.

Switching to telecom, the telecommunications industry represents another emerging area of opportunity.

We are currently in advanced negotiations with a telecommunications conglomerate interested in deploying WEB-key, our patented biometric authentication solution for cloud services and data protection, for their hundreds of thousands of employees.

They're considering our solution to protect their enterprise cloud network, recognizing the significant security and authentication benefits of moving biometric matching to a centralized database in the cloud rather than relying strictly on device-based authentication, which is very prevalent today in the mobile arena.

As more enterprises transition their corporate networks and databases to the cloud in an effort to streamline their overhead and processes, we expect to see ramping demand for our cloud user authentication solutions.

Our WEB-key technology delivers enhanced security and greater productivity, with the additional benefit of reducing overall cost.

These advantages are essential to enterprises seeking to tap the value proposition of today's cloud environment.

On the international front, our Hong Kong-based team continues to lay the groundwork to expand our visibility across multiple new channels, with the objective of building a strong base of customers and revenue in the Asia-Pacific region.

We've already closed a number of agreements from this initiative and are now working to build upon these initial sales and expand our base.

Outside of Asia, we recently partnered with Arthur & Co., a Moroccan-based technology services company, to expand our sales reach in the Middle East and North Africa.

This initiative was driven by the growing volume of inquiries that we are seeing in these regions.

Turning to our hardware offerings, today we announced that our fingerprint readers, SideSwipe and EcoID, are now available on Amazon.com.

This initiative is focused on supporting the awareness and adoption of our solutions in the enterprise community.

Amazon provides a broadly accessible and cost-effective fulfillment function for small orders and product sampling, effectively outsourcing this function with a global leader.

We are launching with a three-pack, also in an effort to keep the focus on enterprise sales.

But down the road we do intend to provide a consumer-focused offering as well as bringing on additional retail distribution relationships to address the consumer mass market.

You will be hearing more about this in the coming quarters.

We also continue to progress our sales efforts with the hundreds of small, medium, and large enterprise customer opportunities that we develop through our marketing efforts with Microsoft.

While advancing any enterprise sales dialogue takes time and persistence, we do expect these efforts to progress more quickly.

And we have the benefit of the visibility by actively leading these engagements.

We've completed or are in process of proof-of-concept engagements with several companies so far, some with user bases well over 100,000.

We remain confident our solutions offer significant value and ease of deployment that should turn into meaningful sales this year.

To expand our global reach and expertise, we expanded our Board with the appointment of Pieter Knook.

He brings to the Board valuable experience in leading mobility and software technology businesses in Europe, Asia, and America.

Most recently he served as the director of Internet services at Vodafone UK, following 18 years at Microsoft, where he was one of the top 25 executives.

We're honored to have him on our Board and will benefit from his perspective, insights, and base of relationships.

I hope I've conveyed some of the excitement and optimism we have for BIO-key's prospects this year and beyond.

While our license revenue was not where we would like it in Q1, we are encouraged by the steady growth in interest in our solutions as well as the growing base of underlying maintenance revenue we are creating as our installed base grows.

We are reiterating our confidence in achieving in 2016 performance objectives within our full-year revenue guidance range of $7.5 million to $9 million, based on the initiatives that I've just described and that we have undertaken.

With that, I would like to ask Ceci to provide a quick overview of our financial performance in Q1 2016 as well as our current financial position.

Ceci?

Thank you, Mike.

Our total Q1 2016 revenue was $430,592, a decrease from $648,826 in Q1 2015 due to lower license and other revenue, offset by continued growth in our maintenance revenue year-over-year.

Q1 2016 gross margins declined to 74% as compared to 79% in Q1 2015, principally due to a decrease in the software license revenue.

Q1 2016 operating expenses increased 2.3% to approximately $1.5 million as compared to approximately $1.4 million in Q1 2015, reflecting a modest increase in R&D personnel expenses.

Our Q1 2016 net loss was $1,163,214 compared to a net loss of $924,103 in Q1 2015.

Now let me turn to our 2016 revenue guidance.

As Mike referenced, our 2016 revenue guidance, which we are reiterating, and generally expect revenues to build as the year progresses.

From a profitability standpoint, our gross margin targets are in a range from 59% to 75%, depending on the mix of services, software, and hardware sales during the period.

Based -- the midpoint of this assumed market range and our current operating plan, we estimate our annual revenue breakeven run rate to be approximately $7.5 million.

Finally, with respect to our balance sheet, BIO-key remains strongly positioned with a $3.5 million cash and cash equivalent.

And now, operator, let's start our question-and-answer session.

Chad?

(Operator Instructions) [Dan Kamis], private investor.

Morning.

Good morning, Dan.

I saw that Microsoft is adding fingerprint sensor capabilities to Windows 10 mobile.

Is this any kind of significant development for BIO-key?

And are you working with any of their customers on any phones?

Okay.

Great question.

Yes, that was announced just a few days ago.

I think the good news here is that Microsoft is recognizing that finger biometrics provide a much stronger authentication option for consumers than the other modes of biometrics, including face.

That's number one.

Number two, they are building in the capability within an SDK to incorporate finger biometrics into applications, which is very good for BIO-key because, as you know, we're working very closely with Microsoft on the back-end, I'll call it the server end of and the device end of Windows 10 and the capabilities that Hello, Passport, and other authentication options within Edge will be available.

So the phone will be an extension of the desktop and the server back-end.

So we see this as very positive and very good for us, and very good for them in perhaps competing against Android and ultimately Apple.

I think what they're trying to do is build this entire cohesive ecosystem.

Which they've had mobile options before; they weren't really closely integrated with their desktop or back-end options.

Now they're creating a real cohesive ecosystem, and biometrics is front and center for them on all of those venues and platforms: server, desktop device, as well as mobile now.

So all good.

I see.

So are you working with the likes of, say, HP on the Elite x3 or anything?

Or is it too early?

We don't really work directly with the handset players, the mobile device manufacturers.

Our partners do that.

For example, IDEX is out attempting to sell finger scanners or sensors to the handset providers; or NEXT Biometrics is selling finger sensors to the likes of Dell and HP.

So we're not out selling directly to the OEMs or to the handset providers.

Our partners are doing that, and we'll get pulled along -- if it's appropriate.

We'll get pulled along for the software for either device matching or perhaps even server-based matching.

All right.

I saw a report also in the Biometrics Research that indicates biometrics in mobile devices -- inclusion of biometrics and mobile devices will generate about $9 billion by 2018.

They claimed multifactor authentication, electronic payments, and bring-your-own-device trend for the enterprises would be the causes.

Are you involved in any current industry efforts to standardize biometric authentication?

Or are there such efforts that you know of?

Interesting you say that.

Yes, our industry association, the International Biometrics and Identification Association, is heavily involved in those types of activities.

First of all, lobbying and ensuring that biometrics get their fair shot as it relates to privacy and as it relates to, of course, security and more dominant use across the government.

So we're very heavily involved in that.

The interesting thing about standards is there are quite a few standards -- for example, template standards for fingerprint matching -- that have been out there for years.

So there is a standard across the industry from a technology perspective that's available, but those standards generally haven't produced products that work as well as some of the proprietary products that companies bring to bear or bring to the table.

So I think that's going to continue to evolve.

But one of the advantages that BIO-key has had for many years as our interoperability: the fact that we can work with virtually any finger sensor and with any device and with any platform, and make these things interoperable for our customers.

We've been doing this for a long time.

And that's one of the components that's making Microsoft and some other very large technology companies very interested in what we do, and making them very interested in incorporating our technology into their backbone so that they don't have to support 20 different devices or 20 different platforms.

So that's something that we're very, very well aware of and very well entrenched with.

All right.

One more question, a housekeeping question.

I noticed your AR, your accounts receivable, were down about $1.2 million.

Can you say, was that a big contract that was collected, or was it a bunch of little contracts?

Can you give some color?

A combination.

We collected well over $1.2 million in the quarter, and it's a mix.

Okay.

I'll get back in queue.

(Operator Instructions) [Frank Wulfers], private investor.

Hey, Mike.

I was wondering, can you give us the -- are you guys still talking to Alibaba, and are you guys thinking about -- for the SideSwipe?

And are you guys thinking about doing a bundle with Dell and HP for your SideSwipe?

Can you give us a little more detail on that, please?

Thanks.

Yes, the answer to that question is absolutely yes.

We are, as I mentioned in my prepared remarks, we're looking at other outlets, channels, and distribution for the SideSwipe, the EcoID, and our soon-to-be-available in volume SideTouch device, which we think is going to be exceptionally popular.

So we started out with Amazon and we're starting slow.

We intentionally put them online in a three-pack because we want to focus on the enterprise customer base right now.

We want to relieve ourselves from the fulfillment responsibility, because we're shipping orders every single day, and some of them are onesie, twosies.

It's very time-consuming and expensive.

So we're looking to reduce our costs, make the product more available.

We're also waiting on -- Microsoft is going to be introducing the anniversary edition of Windows 10 in the early summer; I believe it's slated for July.

That edition is going to offer significantly more biometric functionality for consumers and the mass market; and we'll then roll over to selling single units to consumers and to the mass market through our distribution channel.

So we're starting slowly.

You're going to see this evolve over the next quarter, and we expect to be able to move large volumes of these products through multiple channels over the next two to three quarters.

That's our goal and objective.

Just a quick follow-up.

Is Microsoft really pushing this?

Because it's probably in their best interest to get those out there with Windows 10.

Can you elaborate on that?

Yes, they really are.

They have been exceptionally supportive.

You've seen the press releases that we've introduced over the last really two quarters.

In Q1 we had a follow-up to our significant response to the event that we did with them, the 12-city tour introducing Windows 10 Enterprise and all of the functionality that biometrics make available there.

They are really looking to eliminate the password; and having this capability innate within their product is good.

The beauty about what we provide is that we can retrofit back to any device that has a USB and provide that functionality.

They've upgraded -- the latest statistics we've seen -- 300 million customers to Windows 10; so every one of those customers is a potential prospect to eliminate their PIN or password to access a device.

And then, with the additional functionality that Hello and Edge and Passport are going to provide, to use biometrics to access virtually everything that they access.

So at an enterprise-level, it's intuitive, right?

Accessing the corporate jewels.

For consumers, it will be everything from accessing your social media accounts to your banking to your healthcare.

Whatever you're doing today, the 30, 40, or 50 passwords that you have can be eliminated with the use of biometrics.

All right.

Thank you.

Dan Kamis.

Yes, my understanding was as of December, I guess, that the $12 million was used to buy licenses; and of the $5 million that's considered current and I believe $7 million is long-term, I guess I'm wondering if that $5 million is expected now to be sold -- I guess it would be within the next nine months.

And I have a couple other questions on that after that question.

Yes, our goal, I think, if Ceci could answer the accounting question -- but I don't think you're asking necessarily an accounting question.

You're asking if our goal and objective is to begin to sell these licenses, to incorporate the software that we license into products that get into the marketplace.

And the answer to that question is yes.

Okay.

Can we assume that the 2017 sales of licenses -- I'm talking about the long-term licenses now -- can we assume those 2017 sales at the same rate as the 2016 level?

Or are those spread out over more years?

You know, Dan, I think we'll see.

Our goal and objective is to get our initial sales moving.

We're working with very large payment company; we've incorporated the software into the platform that we're providing for them.

We've got a whole series of host targets and opportunities that we're pursuing.

So obviously we want to consume and deliver that software, that technology as fast as we can.

This will be the first year that we -- although we delivered some of that software in the fourth quarter of 2015, we'll see that accelerate as we get through the year.

But I think we'll have a better feel for that as we evolve through the year.

All right.

Any order of magnitude you can give us on the margins on that, I guess what you're calling inventory, those licenses?

Well, anything related to software is going to have a very, very high margin, right?

You've seen our -- you've followed us for years and quarters, and you know that when we sell a large component of software our gross margins can be as high as 90%.

But you know they generally hover in the 80%s.

We expect the gross margins on our software to remain very, very high.

As it relates to hardware, I think it really depends.

Right now we expect the gross margins to be able to hover in the 60% range.

That's our goal and objective.

So when you blend the software and the hardware, Ceci mentioned our target was to be somewhere between 60% and the high 70%s, and that's our goal and objective.

And it will be driven by volume.

Okay.

I guess on that inventory I'm more looking at the operating margins, after you take out the expense and the inventory, I guess.

They will be very high.

That can't be 90%.

That will be 90%?

It will be very high, yes.

It will be very high.

Because remember, we're not reselling the license; we're incorporating that software.

We have purchased a number of user licenses, a high volume number, but we're incorporating that software into an offering that we're making available.

So it could cut across -- in a year to come it could cut across virtually everything that we deliver.

There's a mobile client component of that software that could be part and parcel of everything that we sell.

So the margins will be considerable.

Okay.

To make the low end of your guidance you'll need an average of $2.2 million a quarter, about, for the next three quarters.

Should we expect the revenues spread somewhat evenly over the next three quarters?

Or are you looking at like a $6 million fourth quarter or something like that?

Or just some color on that.

I'm going to repeat what I said 30 or 45 days ago: our revenue is going to be variable.

I cannot predict if it will be linear, if it will be consistent across the quarters.

That's why we provided annual guidance.

We've got a number of initiatives -- I described them in my prepared comments -- that are ramping.

And as they ramp our revenue is going to grow.

Do I believe that the majority of our revenue will come in the second half?

Yes, I do.

But it won't be evenly based between the three quarters; it will certainly be variable.

Okay, thanks.

You're welcome.

(Operator Instructions) At this time the Q&A session has now ended.

Are there any closing remarks, sir?

Thank you, and thank you all for participating in today's call.

We will hope that you'll join us again for our second-quarter conference call back in the summer, likely in late July or August.

So thank you, everyone.

Thank you, sir.

The conference has now concluded.

Thanks for attending today's presentation.

You may now disconnect.