Aware - Q3 2024

Transcript

Matt Glover (Senior Managing Director)

Good afternoon and welcome to Aware's Third Quarter 2024 Conference Call. Joining us today are the company's CEO and President, Robert Eckel, and CFO, David Travis. Following the remarks, we'll open the call to questions. If you'd like to submit a question, you can do so at any time using the built-in Ask a Question feature in the webcast player. 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. Listeners should please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today.

Aware wishes to caution you that there are factors that could cause actual results to differ materially from those results indicated 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. We were 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 because of new information, future events, or otherwise, except as required by applicable securities laws. Additionally, during this call, we'll discuss 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 measures in the company's earnings release issued today. I'd like to remind everyone that the 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.

Robert Eckel (CEO and President)

Thank you, Matt, and good afternoon, everyone. I appreciate you joining us today. After the market close, we report our third quarter results for the period ending September 30, 2024. The full press release is available in the investor relations section of our website. On today's call, I'll start with a review of our financial and operational performance and provide updates on our product developments and growing global traction. David will then take you through a detailed breakdown of our financials, and then I'll wrap things up with our strategic outlook before we open the floor for questions. In Q3, we continued to execute our long-term growth strategy, focused on expanding annual recurring revenue, or ARR, while also improving our bottom line. We made strong progress in reducing operating expenses, leading to a $1.3 million decrease in the first nine months of the year compared to 2023.

Although total revenue for the quarter was lower year-over-year, this was mainly due to the timing of a couple of contract closures and the impact of a significant one-time license sale in Q3 of last year. The real highlight of the quarter was the 29% year-over-year growth in recurring revenue, which strengthens our foundation for sustainable long-term growth. This builds upon the progress made since 2020, where recurring revenue has grown at a rate of 20%, as we continue transitioning from a book-and-ship organization to a recurring revenue business model. While we encountered delays with some of our larger deals, pushing them to Q4 or early Q1 of next year, we secured a $1 million booking in mid-October, just after Q3 ended. This deal is expected to contribute to a strong Q4 and a solid close to 2024, both in terms of top-line growth and recurring revenue.

Although we are initially optimistic about the timing, these delays represent extended timelines, not lost opportunities. The $1 million booking we recently secured with the European government is a testament to the impactful 2024 enhancement of BioSP, our biometric orchestration and identity management platform. We've diligently improved its usability and multimodal biometric data orchestration capabilities, adding features like offline biometric enrollment, things that are essential for regions with limited internet connectivity or frequent power outages. These updates have not only positioned Aware as a leader in addressing complex infrastructure needs but also demonstrate our proactive approach to anticipating customer demands. This strategic advancement continues to expand our global footprint in a diverse range of use cases we support. Additionally, we expanded our ABIS portfolio by securing two new term contracts and recently added another ABIS account in Q4, bringing the total number of ABIS accounts to five.

As part of our long-term strategy, we are actively working to bring all of these accounts to full production. We expect these projects to generate a steady revenue stream over the next five years and beyond. This consistent growth in our ABIS contract reinforces our commitment to delivering cutting-edge solutions and driving value for our clients. In access control, encompassing both physical and digital solutions, remains a key growth area for us, with the significant traction in stadium access control in Brazil and increasing adoption of AwareID in digital test-taking environments. This demand is especially strong in regions like the Middle East and Latin America, where organizations are prioritizing enhanced security across both physical venues such as stadiums and online platforms.

Our partnerships, including those with organizations like PeopleCert, are addressing the rising need for secure identity verification in our high-stakes testing, helping us acquire new customers in the education sector and expand our reach through a broad partner network. Our SaaS model is gaining momentum with the recent launch of AwareID as a no-code plugin on WordPress Marketplace, significantly expanding our reach. This integration enables companies across industries like online gaming, retail, and e-commerce to adopt secure cloud-based biometric authentication without requiring a deep technical bench. For example, WooCommerce users on WordPress can now implement facial recognition for fraud prevention and password-free checkout. As we continue to navigate this dynamic market, we're observing a growing demand for biometric-based KYC solutions driven by stricter identity verification regulations.

With WordPress powering over 40% of the web, this development is transformative, offering businesses fast, secure KYC and authentication capabilities with minimal upfront infrastructure costs. This has led to momentum in the gaming industry, bolstered by key partnerships that have driven strong customer engagement, a testament to our team's dedication and hard work. The AwareID plugin complements our broader technology stack, which includes SDKs, APIs, and the standard industry OpenID Connect integrations, providing customers with a flexible, scalable solution tailored to their available IT resources and specific needs. Additionally, we made further enhancements to our Aware partnership program this quarter, adding new layers to help grow, support, and better incentivize our partners. This included the introduction of new program pillars focused on collaborative business planning, persona-based enablement, and investment incentivization initiatives for our key partner relationships.

To complement these enhancements, we hosted a partnership summit in conjunction with GITEX Global in the Middle East. This event was a strategic opportunity to reinforce our partner framework. The summit featured a comprehensive agenda covering thought leadership, the state of biometrics, partner insights, and Aware strategic initiatives across sales, marketing, product engineering, and solutions. Additionally, it marked the launch of our new partner ecosystem site, and we received enthusiastic feedback from partners on the value of the content and the collaborative sessions offered. While a few deals expected in Q3 were delayed, we remain optimistic about our performance in Q4, which is shaping up to be strong in terms of recurring revenue, ARR, and overall top-line revenue.

Our pipeline is robust, and we're confident in our ability to capture these opportunities, thanks in large part to our enhanced product offerings and the deepening partnerships we've fostered, driven by our focus on customer feedback. This year, we've made significant strides in expanding our recurring revenue streams while continuing to optimize our operations. We believe these efforts will set the stage for sustained growth in our recurring revenue in the coming quarters, and we're excited about the opportunities ahead as we continue to execute our strategic vision. With that, I'll hand it over to David for a closer look at our Q3 and nine-month financial results. Over to you, David.

David Traverse (CFO)

Thank you, Bob. Good afternoon, everyone. Let's dive into our financial results for the third quarter, which ended on September 30, 2024. Total revenue came in at $3.8 million, compared to $6.4 million in Q3 of last year. This decrease was primarily driven by lower software license revenue, including the impact of a $2.9 million one-time license sale to a federal agency in the year-ago period. Recurring revenue increased 29% year-over-year to $2.8 million, up from $2.2 million in the prior year. This growth underscores our continued focus on building predictable long-term revenue streams, as well as reinforcing the success of our partners and enhanced product portfolio in driving recurring revenues. Moving down the income statement, operating expenses were reduced to $5.3 million, down 6% from $5.6 million in Q3 of 2023, reflecting our commitment to cost management.

Operating loss was $1.2 million, compared to operating income of $1.1 million in the same period of last year. Our GAAP net loss of $1.2 million, or $0.05 per diluted share, compared to GAAP net income of $1.1 million in Q3 of 2023. Please note that operating expenses, operating income, and net income for Q3 of 2023 included $800,000 one-time gain related to our adjustment to the fair value of contingent acquisition payment from 2021 acquisition of Fortress IT. Our adjusted EBITDA loss for the quarter, which we reconciled with GAAP earnings in our earnings release, was $1.1 million, compared to an adjusted EBITDA gain of $400,000 in the prior year. This decline is largely attributed to lower revenue, including the impact of the $2.9 million one-time license sale to a federal agency in the year-ago period.

For the nine months ended September 30, 2024, total revenue was $12.6 million, down from $13.9 million in the same period of last year, again due to lower software license revenue, including the prior year's $2.9 million one-time federal license sale. Recurring revenue grew 19% year-over-year to $8.7 million, making up 69% of total revenue. This increase highlights the strength of our business model and our ongoing efforts to build steady, predictable revenue streams. Operating expenses decreased 7%, or $1.3 million, to $16.7 million, compared to $17.9 million in the prior year. Operating losses for the period was $4.1 million in both the nine months ended September 30, 2024, and 2023. Net loss totaled $3.2 million, or $0.15 per diluted share, compared to a net loss of $3.1 million, or $0.15 per diluted share in the year-ago period.

Please note that operating expenses, operating income, and net income for the nine months ended September 30, 2023, also included the impact of the $800,000 one-time gain related to our adjustment to the fair value of contingent acquisition payment for our 2021 acquisition of Fortress Identity. Adjusted EBITDA loss for the nine months was $3 million, compared to a loss of $3.3 million in the prior year. This improvement is largely attributed to lower operating expenses, which is partially offset by lower revenue. Now turning to the balance sheet. As of September 30, 2024, we had cash, cash equivalents, and marketable securities totaling $27.4 million, compared to $30.9 million at the end of 2023. With a solid balance sheet, we're well-positioned to pursue growth opportunities and make strategic investments that align with our long-term vision.

Our focus remains on advancing our technology, expanding our market presence, and carefully evaluating initiatives that support sustainable growth. This strategic approach allows us to stay agile in a dynamic market, capitalize on emerging trends, and drive long-term value. We pursue a disciplined capital management strategy designed to ensure that we continue making smart investments while maintaining financial flexibility. This positions us to drive innovation, enhance market reach, and deliver returns for our shareholders. We are prioritizing initiatives that not only complement our current offerings but also have the potential to accelerate growth and strengthen our competitive advantage. That concludes my financial summary. I'll now turn it back over to Bob. Bob?

Robert Eckel (CEO and President)

Thanks, David. As we move through the fourth quarter and beyond, we will continue to secure and expand the use cases for our biometric solutions by enhancing their ease of integration to grow our recurring revenue base. A couple of key accomplishments that have positioned us to achieve these future objectives, starting with the transformation and implementation of our scalable business operations, scalable infrastructure, and product offering consolidations. Through these offerings, including our enhanced biometric components, we can leverage our build-once-deploy-many recurring revenue model. With the reusability and configurability of our flagship products, Knomi, BioSP, AwareID, and ABIS and AFIX, largely complete, we are now firmly in the expansion and execution phase of the company's journey. Additionally, we have established proven configurable products with rich functionality, competitive pricing, and an excellent customer support team.

Highlighting the key strategic initiatives outlined last quarter, we continue to focus on one, driving and identifying the key verticals and market areas and customer-driven product-market fit adjustments through the voice of the customer to support our recurring revenue engine. Two, expanding and leveraging our global partner ecosystem to capitalize on opportunities with technology integrators and OEM partners. Three, penetrating new commercial markets targeting specific use cases and encouraging, enabling, and supporting our partners to diversify their revenue streams. Four, continuing to improve revenue predictability by focusing on recurring revenue and SaaS models. Five, accelerating growth by cross-selling, upselling, and expansion of our existing customers with strong support from our dedicated customer success team. And six, sustaining our technological leadership through continued R&D, innovation, using operational data, AI, and machine learning to meet evolving security threats.

With these initiatives in motion, leveraging our business model and strong momentum, we are well-positioned for a strong finish to the year and to build lasting momentum as we move into 2025. We believe we are well-positioned to achieve double-digit recurring revenue growth and sustainable positive cash flow in the future. Before we open the call to questions, I want to share an important update regarding Aware's CEO succession plan. Over the past year, the board and I have worked closely on this plan, carefully considering the future of Aware alongside my own personal goals. After thoughtful reflection, we've developed a strategy that ensures Aware continues its strong growth trajectory while allowing me to focus more on quality time with my family and friends. I believe now is the right moment to transition from my day-to-day role as CEO and President of Aware.

Reflecting on my time with Aware, I remember when I first encountered the company in my previous role where we relied on Aware's robust biometric and middleware components. Since joining in 2019, my focus has been on transforming Aware into a company driven by a recurring revenue model. The shift has not only improved our top-line revenue but also built a strong, predictable foundation for the future growth. We've successfully transitioned from a project-based model to one centered on annual recurring revenue, providing greater stability and predictability. From 2020 to 2023, we've achieved a 20% increase in ARR and recurring revenue, along with 15% top-line growth, all while maintaining gross margins above 90%. Our flagship products, Knomi, BioSP, AwareID, and ABIS AFIX, have played a key role in the success, positioning Aware well for the next phase of expansion.

Given the company's strong momentum and the promising path towards sustained profitability, this is the ideal time to pass the leadership on to a proven expert who can accelerate AWARE's growth and further expand our commercial footprint. With the recent departure of our CRO, the timing is right to bring in a new CEO who will not only sustain the progress we've made but also help strengthen our team to take full advantage of the abundant market opportunities. To ensure a smooth transition, the board has engaged an executive search firm to identify my successor, with a transition period extending through December 31, 2024. Additionally, the board has appointed an experienced executive strategic advisor who will work closely with me, the board, and the leadership team to refine our market position, product roadmap, and growth strategy.

This advisor will provide strategic guidance to help Aware remain competitive without taking on any direct operational responsibilities. It has been an incredible privilege to serve Aware over the past five years, and I'm confident the company is well-positioned for continued success. Here's to a bright future with Aware's intelligent biometrics delivering security convenience and a seamless biometric experience. We'll now open a call for questions. Matt, please provide the instructions.

Matt Glover (Senior Managing Director)

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. First question. What do you anticipate your run rate revenue will be by year-end?

David Traverse (CFO)

Thanks, Matt. I can take that one. So we're on track to achieve double-digit revenue growth in 2024. This, along with the seven new contracts, including expanding partnerships across sectors like access control and digital education, sets us up for a strong recurring base in 2025 that we're excited about.

Matt Glover (Senior Managing Director)

Thanks, David. Our next question. Can you provide more details about the $1 million European government booking secured in October? Specifically, what were the key factors that led to winning this deal, and how do you see it contributing to future recurring revenue?

Robert Eckel (CEO and President)

Yeah, I'll take that, Matt, so just the $1 million booking we secured with the European government in October of this year, it was pushed out from September. It is a key highlight for Aware. I mean, this deal was won as a direct result of the enhancements we made to our BioSP solution. Also, including in this solution is multimodal biometric data orchestration capabilities. We enhanced the user interface, and we introduced an offline biometric enrollment mode. This feature is particularly valuable for customers in regions or situations with limited internet connectivity, and it proved to be a differentiating factor in securing this deal. The deal is expected to contribute to our Q4 results and will help us build a foundation for future recurring revenue as the government rolls it out to multiple additional use cases.

Government deals are often multi-phase, and we anticipate this deal will lead to further opportunities in the region as we deepen our relationship with the client and enhance their biometric infrastructure. Additionally, I'm going to add to this that this product can also provide a fundamental function and stable platform for border and immigration management and control as well.

Matt Glover (Senior Managing Director)

Thanks, Bob. Another one for you. Can you discuss the impact of the launch of AwareID as a plug-in on the WordPress Marketplace? How significant do you expect this to be in terms of customer acquisition and market penetration, particularly in sectors like online gaming and e-commerce?

Robert Eckel (CEO and President)

Yeah, that's a great question. I mean, the launch of AwareID as a plug-in on the WordPress Marketplace is a key strategic move. It opened up the door to new customer acquisitions in sectors such as online gaming, e-commerce, and retail, and I think we know or it's known that WordPress powers over 40% of the internet, and by offering a no-code biometric solution, we are enabling businesses of all sizes, especially those with very limited technical resources, to integrate secure biometric authentication. We've already onboarded several new customers through this initiative, with many of them already live. The simplicity and affordability of the plug-in makes it accessible to a wide range of businesses, and as this market matures, we expect AwareID's adoption to accelerate our recurring revenue growth, particularly in high-risk industries like the online gaming, gambling, where fraud prevention and secure identity verification are critical.

Matt Glover (Senior Managing Director)

Thanks, Bob. Our next question. With the delays in contract closure shifting some deals to Q4, early Q1, what is your level of confidence in closing these deals within that timeframe? Can you elaborate on the nature of the delays and how they impact your overall revenue forecast?

Robert Eckel (CEO and President)

Yeah. I mean, while some of the deals we expected to close in Q3 were delayed, we remained confident that they will close in Q4 or early 2025. These delays were largely due to additional or new scope discussions and expansions requested by the customers. So these extended timelines do not reflect the loss of the business, but rather an enhancement of the project scope. And we believe this will ultimately result in a greater long-term value. And in some other cases, the delay was with a pending customer award. Furthermore, we continue to meticulously review our pipeline. I'm working that with David as we speak continuously and working to minimize unpredicted timeline changes and their impact on our long-term expectations.

Matt Glover (Senior Managing Director)

Thanks, Bob. Our next question. What will be the focus areas for the executive strategic advisor?

Robert Eckel (CEO and President)

I'll take that. As I stated in my remarks, the board is tasked with enhancing Aware's market position, refining its product roadmap, and providing strategic guidance to drive the growth and competitiveness. So serving in an advisor capacity, the advisor will support the executive team on high-level decisions, prepare Aware for sustainable growth, and a smooth CEO transition without any direct operational responsibilities, which I'll still maintain.

Matt Glover (Senior Managing Director)

What is the board's plan if a new CEO has not been appointed by year-end?

David Traverse (CFO)

I can take that one, Matt. The board, along with the executive search firm, they're focused on finding the right candidate for the position and ensuring a seamless transition. This is exactly part of the reason of hiring the strategic advisor. It's also to ensure the smooth transition. I also want to point out from a financial statement perspective, we do estimate that we'll recognize approximately $900,000 of one-time expenses in the fourth quarter related to the search for the new CEO, the transition, as well as the hiring of the executive strategic advisor.

Matt Glover (Senior Managing Director)

Thanks, David. At this time, this concludes our question-and-answer session. If your question wasn't answered, please email Aware's IR team at [email protected]. And now, I'd like to turn the call.

David Traverse (CFO)

Oh, Matt, one more thing.

Matt Glover (Senior Managing Director)

Sorry, go ahead, David.

David Traverse (CFO)

Yeah, thanks, Matt. I just wanted to take a minute just to personally thank Bob for his unwavering support over the years, both to me and to Aware. Bob's guidance and encouragement have been invaluable in my own journey, and Aware would not be positioned for success and growth we are set to achieve without his leadership and steadfast dedication over the past five years. His impact on the company and its future, and really, I want to say on my own personal growth, cannot be overstated. We are deeply grateful for the path he has helped us pave for Aware's continued progress.

Robert Eckel (CEO and President)

Thank you, David. That's very nice of you. It's been a pleasure working with you on this stuff. And you got me for a couple more months still.

David Traverse (CFO)

Thank you.

Robert Eckel (CEO and President)

So yeah, so I just want to thank all of you for joining us and your thoughtful questions. This will be my last time addressing you as CEO, and I wanted to take a moment to express my deepest gratitude to our shareholders, partners, and most importantly, the talented team at Aware. Together, we've achieved meaningful growth, pushed boundaries in biometric technology, and really set a solid foundation for the future. I have to say it's been an honor to lead this company and work alongside such a great, dedicated, innovative team. And I'm very confident that Aware is in strong, capable hands, a good team, David, and so forth, and will continue delivering value, innovation, and growth. Thank you once again for your trust and support. I look forward to following Aware's journey as it reaches new heights. And Matt, I'll hand it back over to you.

Matt Glover (Senior Managing Director)

Thanks, Bob. I'd like to remind everyone that a recording of today's call will be available for replay via link in the investor section of the company's website. Thank you all for joining us today for Aware's third quarter 2024 conference call. You may now disconnect.