Aware, Inc. (NASDAQ:AWRE) Q2 2023 Earnings Call Transcript

Aware, Inc. (NASDAQ:AWRE) Q2 2023 Earnings Call Transcript August 1, 2023

Aware, Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.08.

Matt Glover : Good afternoon, and welcome to Aware’s Second Quarter 2023 Conference call. Joining us today is the company’s CEO and President, Robert Eckel; CFO, David Barcelo; and CRO, Craig Herman. Following their remarks, we’ll 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 uncertainty 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. You are cautioned not to place undue reliance upon any forward-looking statements, which speak as only 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 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 would 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 would like to turn the call over to Aware’s CEO and President, Bob Eckel. Bob?

Robert Eckel: Thanks, Matt. 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 ended June 30, 2023. A copy of the press release is available in the Investor Relations section of our website. On today’s call, I will first discuss our financial and operational performance for the second quarter. Next, I’ll review the steps we’ve taken to drive growth and scale for Aware. Then our CFO, Dave Barcelo will provide details on our second quarter results. After Dave’s remarks, our CRO, Craig Herman will discuss our strategic initiatives to advance the company’s go-to-market motions and increase sales. Finally, I’ll review our key business drivers and 2023 outlook before opening the call for questions.

Like last quarter, I’d like to start by briefly introducing who we are and what we do for those of you who may be new to Aware in our industry. Aware is an identity platform partner working to enhance trust in an increasingly connected world. Our mission is to balance security and user experience through technology for the few and at scale. We reduced fraud and enable compliance and security needs as well as improve business efficiencies through our offerings that address identity challenges of today while preparing for identity challenges in the future. These offerings facilitate digital onboarding, authentication and life cycle management of the user’s biometric identity through proven and trusted multimodal adaptive biometrics. Over the last 30 years, we’ve led with deep-rooted systems level, technical expertise and algorithms trained on the most diverse operational data sets in the world.

Our reputation in the biometric industry has earned its trusted spots with many governments and today, our technology can be found in expanding in all three branches of the U.S. federal government and more than 20 financial institutions in over 150 law enforcement agencies worldwide. Our technology, which spans four technology platforms has been deployed by more than 60 partners in more than 20 countries and is protected by nearly 80 patents and numerous trade secrets. And while we cherish our roots and work hard to maintain our loyal customer base, we have actively shifted the company over the last three years. Our business model has changed. Our culture has changed. Our infrastructure has changed, and our target customers now include a growing portion of commercial clients.

These contribute to over quarter of our revenue. We focus our technology to provide enterprise solutions for digital onboarding and authentication across verticals and to maximize business efficiencies. Our transformation has been accomplished with a significant emphasis and shift towards recurring revenue, which hit approximately $10 million in 2022 and is continuing to build in 2023. Now with that background in context, I’d like to discuss our operational and financial achievements for the second quarter of 2023. In Q2, we focused largely on protecting, securing, expanding our recurring customer base through product enhancements and improving our partner-centric sales strategy. This year, we renewed our largest Knomi customer for another three years.

And in Q2, we continued to expand the scope and size of that contract. We also secured our largest EME partner in their banking customers with our new upgraded biometric and identity verification platform and an additional use case along the way. Lastly, as the quarter closed, we signed a 5-year, $5 million contract with options up to $8 million, which include a facial recognition upgrade to our largest BioSP customer. I’ll let Craig go into more detail on the progress we’ve made expanding the base. But I want to highlight a few more proof points of progress and success from this quarter. We signed several quality commercial customers in Latin America and in Turkey, furthering Aware as wallet share overseas. We’ve also continued our momentum winning ABIS contracts, having won two more ABIS awards, one of which is our First Cloud ABIS award ever in the Miami Valley, Ohio.

and we expect these ABIS contracts to start generating revenue in Q3. The new logo signed in Q2 are a testament to the confidence corporations and the governments have in Aware’s technology to protect both consumers and nations alike. The key drivers behind our success securing and protecting the base this quarter have been our recently implemented customer success focus and processes, which Craig will talk about more in depth later as well as a few product enhancements we recently rolled out. With security challenges evolving every day, it’s critical we are constantly improving and adapting Aware’s technology to continue providing best-in-class security. This quarter, we focus on development efforts reinforcing the capabilities of AwareID’s facial authentication, improving Knomi’s liveness detection excellence and upgrading our orchestration to address new identity verification use cases with document authentication.

Given the enhancements to Knomi and AwareID, we are confident Aware is well positioned to capture additional market share in both existing and new use cases. In fact, these updates already have helped us secure contracts mentioned previously. With an improved partner-centric sales strategy, enhanced biometric solutions and robust pipeline, we are confident we can expand our global footprint and capitalize on the growing biometric industry as a whole. Now I’ll turn the call over to Dave to walk us through our financial results for the second quarter before discussing our initiatives and outlook for the remainder of 2023 and beyond. Dave, over to you.

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David Barcelo: Thank you, Bob. Good afternoon to everyone on the call. Turning to our financial results for the second quarter ended June 30, 2023. Total revenue was $3.2 million compared to $4.3 million for the first quarter of 2023 and $4.2 million for the same year ago period. The sequential and year-over-year decrease in total revenue was primarily due to lower software license revenue in the period. For Q2 of 2023, recurring revenue was $2.1 million or 65% of total revenue. The $2.1 million in recurring revenue was down 32% sequentially due to contract renewal timing. Looking at our operating expenses. Our second quarter of 2023 operating expenses were $6.1 million slightly down from $6.2 million in the prior quarter and up from $5.6 million in Q2 of last year.

Operating loss for the second quarter of 2023 was $2.9 million compared to $1.9 million in the prior quarter and $1.4 million in the same year ago period. For the second quarter of 2023, GAAP net loss totaled $2.7 million or $0.13 per diluted share compared to a GAAP net loss of $1.6 million or $0.07 per diluted share in Q1 of 2023 and $1.3 million or $0.06 per diluted share in the same year ago period. Our adjusted EBITDA loss for the quarter which we reconciled to GAAP net loss in our earnings release, totaled $2.4 million, which compares to adjusted EBITDA loss of $1.4 million in the prior quarter and a loss of $0.8 million in the same year ago period. Looking at our balance sheet. We ended the quarter with $25.1 million in cash, cash equivalents and marketable securities, compared to $27.3 million at the end of the prior quarter.

While our cash position remains strong, we continue to optimize our cost structure to align with our business needs. Furthermore, our robust cash position allows us the flexibility to evaluate all high ROI opportunities that have the potential to drive scale and further Aware’s growth road map. This completes my financial summary. Now I’d like to turn the call over to Craig to discuss the progress we’re making on our go-to-market strategy. Craig?

Craig Herman : Thanks, Dave. It’s a pleasure to be here with you all today. As Bob mentioned, in the second quarter, we continued securing and expanding the base, allowing our customer success team to secure several significant contracts. We are seeing increasing interest for Aware’s biometric solutions across all our verticals, which is reinforced by the sequential improvements in the fidelity of our sales pipeline. In order to capitalize on the high-quality opportunities flowing through the pipeline, we are focused on our optimized go-to-market strategy, which really comes down to three buckets or themes. The first is building out our customer success framework. Leading up to the second quarter, we laid the groundwork for this program by hiring the right people and shifting resources towards more customer-facing revenue streams.

This quarter, we continued building out these efforts to protect the base by cementing our customer relationships through contract expansions and renewals. Our customer success team has done a fantastic job maintaining customer relationships and upselling contracts. In fact, this quarter, one of our larger OEM partners increased their purchases by over 200% and two banks in Latin America meaningfully increased both their usage and services because of our team’s endeavors. The second initiative is to solidify our customers and partners to counteract deals being pushed out due to the macroeconomic environment as well as introduce usage-based pricing. Pressures from the macroenvironment are still forcing customers and partners to delay signing.

However, we are beginning to see these pressures ease with some deals getting close to closing. One contract, in particular, is a large government customer that our team has been working to secure over the past few quarters. but we finally anticipate closing this deal in Q3. It’s important to note that contracts are not disappearing, just sliding into later quarters. A more recent evolution of our go-to-market strategy was the introduction of usage-based pricing, which the industry has been trending towards. Usage-based pricing not only allows our team to accelerate the sales process but will also be a big push for our software services and subscription-based revenues. This reevaluated sales strategy enabled us to close the contract and move to onboarding faster with a very significant airport security player in Spain, who will positively impact our subscription-based revenue in the coming quarters.

By implementing this pricing tier, we can now cater to the customers’ needs, allowing us to sign on partners and customers of all sizes in all types of macroenvironments. Lastly, almost half of our pipeline is partner-driven, therefore, we have prioritized investments in our partnership program. Coming in 2023, we made conscious efforts to widen our partner footprint, especially in Latin America as well as to procure partners that could drive organic growth and increase our market share. In Q2, we signed four additional partners in Latin America who will help expand our wallet share in the region through both organic opportunities as well as displacing competitors, which was the case with one of these new contracts. We are proactively seeking potential partners in the biometric space with active accounts to lay the groundwork for future business.

Moving forward, we’re aiming to launch a formal partnership program in the latter half of Q3. This new program will be equipped with onboarding tiers, partnership incentives and additional marketing to help fuel partner engagement. Another key development Bob touched on earlier was the product improvements for AwareID’s facial recognition and Knomi’s liveness excellence. Through the market feedback, we identified and adapted the functionalities of these two solutions, allowing our sales and partner teams to go-to-market with more robust and secure technologies. Already, these enhanced capabilities are generating significant momentum for Knomi and renewing the market enthusiasm for AwareID, especially in document verification. Our customer success team is doing a tremendous job upselling the new functionalities and recently renewed a customer for another five years.

Now I would like to turn the call back to Bob for additional insights into our key business drivers. Bob?

Robert Eckel: Thanks Craig. Backed by enhanced product portfolio and optimized sales strategy, this quarter, we secured and protected our base by reinvigorating the market’s excitement for Aware. We’re exiting the first half of 2023 with significant contracts and partnerships that we expect to greatly contribute to recurring revenue and lay the foundation for additional prospects. With a healthy pipeline of quality opportunities and an optimized enterprise sales strategy, we are reiterating our expectation to increase total revenue and annual recurring revenue, or ARR, by 15% in 2023. We also continue to expect operating cash flow exiting 2023 to be neutral, which means we’ll be managing both inflows and outflows towards profitability while taking into consideration cash interest and timing expectations.

Looking into the second half of the year, we are excited about our upcoming expanding partnerships and deliveries and believe we are well positioned to achieve our cash flow goals and remain confident in our ability to grow sustainably and deliver robust recurring revenue going forward. We appreciate everyone’s continued support and are excited for Aware’s future. With that, we are ready to open the call to questions. Matt, please provide the appropriate instructions. .

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Q&A Session

Operator: [Operator Instructions]

Matt Glover : Our first question, Bob, you mentioned that one of the main focuses this quarter was to protect and expand the recurring customer base. Can you provide some additional details on contract wins secured this quarter?

Robert Eckel: Sure, Matt. Since we announced our business transformation and focus on our recurring revenue model, we continue to make considerable progress and we’ve expanded our recurring customer base. In fact, our recurring revenue as a percentage of total revenue in Q2 was 65%, which is a 16% increase compared to the prior year period. This quarter, we signed expansion and renewal contracts and agreements with some of our largest customers as well as secured our next-generation customers. When I mentioned in my previous prepared remarks, we renewed and expanded our largest customer in Knomi, which is Itau for another three years. We also signed our biggest EME partner and their banking customers as well. And then we signed two new ABIS contracts, one of them being our first ever SaaS cloud ABIS contract, which we talked about.

Another key customer we secured this last quarter was a 5-year, $5 million contract with our largest BioSP customer. And this will be recognized over the next 5-year period. This contract improves our annual recurring revenue, but also expands the capabilities of the customer system. And it introduces facial recognition in addition to fingerprint capability. And this contract represents a significant win for Aware and reaffirms the confidence our customers have in our technology. And we’re just continuing to build our foundation for future recurring revenue growth with each new contract signed, and we’re excited about the second half of 2023 and believe we have several promising opportunities in our pipeline.

Matt Glover : Thanks Bob. What was recurring revenue for the quarter? And how much recurring subscription revenue and how much was recurring maintenance revenue?

David Barcelo: I’ll take that, Matt. So our recurring revenue in Q2 was about $2.1 million. That’s broken out to about $1.6 million of maintenance and the balance was our consumption or subscription-based revenue.

Matt Glover : Bob, you talked about the fidelity of the pipeline improving. Can you talk about what this means and what Aware needs to do to convert its pipeline?

Robert Eckel: Yes. So taking a step back and looking at the pipeline on a trailing 12-month basis, we have seen a big improvement in the quality of the opportunities. So we took a significant motion to implement rigorous opportunity qualification for the new opportunities. And we’re seeing more through our established and growing customer base. So we’re actually seeing through our customers that we’ve already signed up as partners their base increasing and improving. So we have a better grasp on our needs and business challenges so that we can solve that through our different products. And then I just mentioned through Craig’s efforts, we’re seeing a more expansive deals being negotiated as well as increased opportunities to secure new partnerships that will significantly expand our wallet share of the market.

Craig already mentioned this in his remarks, but his team is laser-focused on building out a formal partnership ecosystem, and that’s going to help generate new business and broaden Aware’s reach globally.

Matt Glover : Bob. Next question, how are operating expenses trending this year?

David Barcelo: Yes, our operating expenses have increased sequentially this quarter. I mentioned that earlier. And that’s mainly due to investments in our sales team. We onboarded a new team of CSMs and BDRs in Q1. So those costs have increased. But we don’t anticipate adding any significant OpEx in the second half of 2023. In fact, we’re expecting our OpEx will be flat to down-ish in the third and fourth quarter. We’re, of course, working towards cash flow neutrality.

Matt Glover : Next question is for Craig. What have been the driving forces behind the sales team’s success in the recent bookings?