Aware, Inc. (NASDAQ:AWRE) Q4 2022 Earnings Call Transcript

Aware, Inc. (NASDAQ:AWRE) Q4 2022 Earnings Call Transcript March 9, 2023

Matt Glover: Good afternoon, and welcome to Aware’s Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining us today is the Company’s CEO and President, Robert Eckel; CFO, Dave Barcelo; and CRO, Craig Herman. Following their remarks, we’ll open the call for questions. Before we begin today’s call, I’d like to remind everyone that the presentation 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 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, 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, the 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 non-GAAP financial measures to the most directly comparable GAAP measures in the company’s earnings release issued today. This presentation will be recorded and made available for replay via a link 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: Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we issued a press release with our results for the fourth quarter and fiscal year ended December 31, 2022. A copy of the press release is available in the Investor Relations section of our website. On today’s call, I will begin by discussing our financial and operational performance for the fourth quarter and the full year 2022. Then I’ll review the progress we’ve made positioning our company to realize greater scale and sustainable growth. Afterwards our CFO, Dave Barcelo, will provide additional details on our fourth quarter and full year 2022 performance. Next, our CRO, Craig Herman will discuss our strategic initiatives to bolster sales and advance our go-to-market efforts.

Finally, I’ll review our key business drivers and 2023 outlook before opening the call to questions. For those of you who may be new to our company, let me step back for a moment and provide a brief overview of who we are and what we do. 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 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, adaptive, meaning configured, sometimes preconfigured, it’s based on the customer’s technical capability, as well as the use case and the end user’s risk profile.

2023 marks our 30th anniversary and has given me pause to reflect on both the old and the new. For 30 years, we’ve led to a 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 us trusted spots with many governments, and today, our technology can be found in all three branches of the US federal government, more than 80 government agencies and over 300 law enforcement agencies worldwide. 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, which contribute to over 1/4 of our revenue.

We focused our technology to provide enterprise solutions for digital onboarding and authentication across verticals and to maximize business efficiencies. Those of you following our story for the past couple of years now know that this transformation has been accomplished with a significant shift towards recurring revenue, which hit approximately $10 million in 2022. Now that you understand more about who we are and what we do, I’d like to shift gears to discuss our operational and financial accomplishments during 2022. At a high level, 2022 can be best characterized as an impactful transition year for Aware, where we further solidified and strengthened our organization and our technology offerings, as well as positioning Aware for greater scale and profitable growth in years to come.

During 2022, we applied a deep focus on advancing and solidifying our solutions, product infrastructure fulfillment mechanisms and processes, as well as accelerating recurring customer growth. The changes we made over the last several months, including enhancing our sales team, refining our go-to-market execution and establishing a customer success team, have positioned us to grow and expand our market share with our Knomi and BioSP offerings, as well as capitalize on AwareID, our new cloud-based SaaS solution. Our customer success team has already made a noticeable impact on our organization and sales effort. Established over the course of Q4, the team focused on accelerating customer onboarding, retaining and expanding existing customers through improved customer satisfaction and personal attention and driving overall success in using Awares technology.

In fact, already this quarter, our customer success team was instrumental in bringing a key new customer live as well as enabling several customer renewals. Additionally, the customer success team is central to reducing the onboarding time for integrated resellers, while allowing the sales team to focus on selling. Our partner reseller strategy is a key component to our go-to-market strategy, and we are encouraged by the success we have built in this area. During 2022, we added seven new Knomi resellers across multiple geographies, including Latin America, the UK, Egypt, Morocco and Jordan. In addition to reinvigorating our sales teams and go-to-market strategies, we expanded and filled out our product portfolio. We launched AwareID back in October and have been working diligently to advance customer adoption of our cloud platform that can be provided as a SaaS or controlled and deployed in the customer environment.

Furthermore, we leverage customer feedback to develop pre-bundled high-demand configurations of BioSP to accelerate deployments and extend product reach to customers who previously didn’t have the time or resources to integrate or configure BioSP. The BioSP product line realized increased market acceptance in 2022, and these pre-bundled configurations are expected to further expand accessibility of this foundational offering. In Q4, we also completed the full integration of Fortress ID’s technology, a highly complementary business we acquired in December of 2021. This expanded our offerings around identity proofing to directly address financial compliance requirements, enable organizations to mitigate risk and curtail fraud. Lastly, throughout 2022, we focus on optimizing our organizational resources to best position the company for success in 2023 and beyond.

As part of this effort, we relocated our corporate headquarters to Burlington, Massachusetts to a smaller, more modernized facility that better meets our needs. Before continuing with our initiatives for 2023, I’ll turn the call over to Dave. He will walk you through our financial results for the fourth quarter and the full year. Dave, over to you.

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Dave Barcelo: Thank you, Bob, and good afternoon to everyone on the call. Turning to our financial results for the fourth quarter and year ended December 31, 2022. Our total revenue in the fourth quarter was $4.1 million, up 35% sequentially and up 2% on from the $4 million in the same year ago period. The sequential improvement in revenue was largely driven by increases in revenue attributed to Knomi and BioSP For the 12 months ended December 31, 2022, total revenue was $16 million compared to $16.9 million in the same year ago period. The decrease in revenue was primarily the result of lower revenue from Perpetual Software Licenses and Services, which was partially offset by increases in software maintenance revenue and revenue from subscription-based licenses.

As such, recurring revenue grew 7% to a record $9.7 million in 2022 as we progress further on our business model transformation. Now looking at our operating expenses. For the fourth quarter of 2022, our operating expenses increased to $6.1 million compared to $5.5 million in Q4 of last year. The operating expenses for the 12 months ended December 31, 2022, were $18.2 million, down from $23 million in 2021, which included the favorable impact of a $5.7 million gain in 2022 on the sale of our former corporate office. With regards to our profitability measures, operating loss for the fourth quarter of 2022 was $2 million, which compares to an operating loss of $1.5 million in the same year ago period. For the full year, operating loss was $2.2 million, compared to an operating loss of $6.1 million in 2021.

Improvement in operating loss in 2022 was primarily due to the gain we recorded related to the sale of our corporate office, which was offset by a decrease in revenue, increase in sales and marketing expenses as well as increase in G&A expenses. For the fourth quarter of 2022, GAAP net loss totaled $1.8 million or $0.08 per diluted share compared to a GAAP net loss of $1.3 million or $0.06 per diluted share in the same year ago period. For the full year of 2022, GAAP net loss totaled $1.7 million or $0.08 per diluted share compared to a GAAP net loss of $5.8 million or $0.27 per diluted share in 2021. Adjusted EBITDA loss for the fourth quarter, which we reconciled to GAAP net income in our earnings release, totaled $1.5 million, which compares to an adjusted EBITDA loss of $0.9 million in the same year ago period.

For the 12 months ended December 31, 2022, adjusted EBITDA loss totaled $5.4 million compared to an adjusted EBITDA loss of $3.8 million in the prior year period. Switching gears to our balance sheet. We had $29 million in cash and cash equivalents and marketable securities at the end of the quarter compared to $31 million at the end of the prior quarter. We utilized $1.2 million of our cash to repurchase 628,000 shares of our common stock at an average price of $1.83 per share in the fourth quarter of 2022. Bringing the total amount of common shares repurchased in 2022 to 705,000, reducing outstanding shares by over 3% as we continue to be strategic in our stock buyback program and increased value for our existing shareholders. Our balance sheet remains robust and provides us with the flexibility to allocate capital to opportunities with high ROI potential that align with our long-term expansion and product road maps.

Along that line, we continue to evaluate strategic opportunities that would enable us to generate sustainable and predictable growth for 2023 and beyond. This concludes my financial summary. Now our CRO, Craig Herman, will discuss our sales strategy. Greg?

Craig Herman: Thank you, Dave. It’s a pleasure to be here with you today. Shifting to our sales and go-to-market initiatives. Bob touched on a few of the key customer wins that were a direct result of our customer success team and new product offerings. In particular, Aware ID opportunities have started gaining momentum, and we are exploring several new marketplaces to expand our reach. In support of our customers, our SaaS offering rounds out our portfolio to ensure deployment flexibility that meets our customers’ needs. We are still in a transitionary phase with select customers, especially those in the financial services space. We prefer to have our solutions deployed on-prem or in their cloud instance to be controlled and managed by them.

Nevertheless, we are still onboarding new Aware ID customers and working diligently to ramp customer adoption whether as managed services and therefore SaaS or a licensed subscription. In parallel with expanding Aware ID’s reach, we are also realizing increased traction with Knomi, our mobile biometric authentication framework. Recently, we extended our contract in scope work as one of the largest banking institutions in Latin America, which have been leveraging Knomi to prevent bank fraud among its more than 50 million customers globally. In terms of our enterprise sales strategy, this year, we are applying intentional focus to three critical areas. First, we are centering efforts around gaining momentum in the Fintech market, Aware is a leader in banking fraud prevention, which is why we are trusted by some of the largest financial institutions around the world.

With our reinvigorated sales process and newly introduced customer success team, we are poised to gain a meaningful share of the financial services market. Our second initiative is to continue evolving and strengthening our partnership programs. Awares technology is modular and agnostic, features that are ideal for partners and which allow us to sell solutions rather than just products. Renewed emphasis on partners will help us gain more traction globally without the need for significant expansion of regional resources. Lastly, we are working towards expanding our footprint in the US commercial market. Aware is a track record of success in the government space, with our technology being trusted by governments across the globe. Our customers are extremely sticky, posting 93% retention rate over 2022 and some of our relationships with major US federal agencies span over 20 years.

Additionally, our technology features adaptable connectors for compliance, making it able to be integrated in any setting. Despite this recognition globally, our progress has moved slowly with respect to breaking into the US commercial market. However, with the success we’ve had amongst US federal agencies and global penetration of our platforms, we are well positioned to capitalize on this market opportunity. In summary, our optimized enterprise sales and partner strategy is gaining momentum, validated by the growing number of integrated reseller partners and customer wins, as well as the expanding reach of our technology into new markets. With the continued efforts of our customer success team, coupled with the building demand for our solutions across key markets, I am confident in our ability to scale our business and drive sales in the years ahead.

Now I would like to turn the call back to Bob for additional insights on our priorities and outlook for 2023. Bob?

Robert Eckel: Thanks, Craig. In 2022, we entered the final stage of our business model transition to a platform company with robust recurring revenue and unveiled our highly anticipated SaaS offering AwareID. This past year, we also generated significant momentum for our brand awareness and authentication solutions. These efforts have positioned us to enter the new year with an exciting pipeline of opportunities that are starting to convert at an encouraging pace. Our recurring revenue has essentially doubled over the last three years, as we retooled our business processes to enable transactional or term contracts or per user subscription offerings. At the same time, we upgraded our products to ensure that they supported the new business model and could be deployed and delivered across all customer installations, from single-tenant cloud and multi-tenant shared cloud services to customer-controlled on-premise or cloud infrastructure as determined and driven by the customers’ security, business rules and processes.

This capability, both from a business and product perspective, didn’t exist at this level until October of 2022. Our current recurring revenue ending 2022 is not far off from the total revenue achieved in 2019 or 2020. With the ratio of our recurring revenue to total revenue was around 50%, we finished 2022 at $9.7 million in recurring revenue, which is a 61% ratio on total revenue. Said another way, we set a company record this past year by achieving almost $10 million in recurring revenue. When I came aboard a few years ago, I outlined the need for the company to transition the business and technology models to improve the quality and repeatability of revenue versus the onetime program and project wins. I’m excited for the progress to date and confident we’ll continue in this direction.

In 2023, we’re continuing to focus on driving recurring revenue and increase our percentage of recurring to total revenue, enabling us to focus on new logos, while improving our leverage and efficiencies. The focus on ARR will continue to have varying degrees of maintenance, subscription and SaaS makeup as Aware is able to provide the fulfillment model of choice for our customers, a flexibility that sets us apart from the competition. That said, for 2023, we have three strategic goals: to drive growth by focusing on scalability through partners and marketplaces, to protect the base by retaining and expanding core customers and business areas and to confirm and establish AwareID’s product market fit through targeting adoption in select industry verticals.

As you heard, the revenue team is working diligently to boost our partner program and improve and accelerate customer onboarding to allow us to enter new markets faster, thereby reducing the time to revenue. Furthermore, having team members with a dedicated focus on retention and expansion within our core base of customers will also contribute to our continued transformative progress, while other members of the team focus on new logos. It’s not all on Craig’s team though. The entire organization is unified and aligned behind these goals and is leveraging the optimized organizational resources I mentioned earlier, to ensure collective success. We expect that our success on our strategic goals will translate to a 15% growth in Annual Recurring Revenue, or ARR, in 2023.

We also anticipate that the measures we took last year to optimize our organization and resources, when combined with this growth will allow us to achieve positive operating cash flow exiting 2023. Looking ahead, we are gaining strong operational momentum and our focus on the execution of our strategic roadmap, to scale aware for sustainable future growth. We remain confident in our ability to deliver promising results in 2023 and beyond. We appreciate your continued support, and are excited for what lies ahead for our company and the industry. With that, we are ready to open the call to questions. Matt, please provide the appropriate instructions.

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Q&A Session

A – Matt Glover: 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 is for Bob. You mentioned a healthy pipeline. Can you provide some color on any contract or product wins?

Robert Eckel: Yeah. Thanks, Matt. As we mentioned in the earnings release, we signed seven new Knomi partners in 2022 and that’s what covers throughout the world. I’d have to say that our Knomi product line is gaining momentum and will be a cornerstone of our growth in 2023 and that further fuels our confidence to increase our ARR by at least 15%. Already this year, we’ve extended one of our largest only customers, for an additional three years and more use cases. We are also working closely with our partner, Intercede on some interesting deals in the federal government. And lastly, I expect us to be announcing our first cloud-based award in U.S. Law Enforcement in the near future, along with other exciting firms.

Matt Glover: Thanks Bob. What are the company’s capital allocation plans for 2023?

Robert Eckel: Thanks, Matt. Yes, as you probably saw in the earnings release, we had $29 million of cash and marketable securities at the end of the quarter. at the end of Q3 and into Q4, we took advantage of the higher interest rates in the overall market and invested a large portion of our cash in highly liquid marketable securities. More broadly, the leadership team and I, and the Board, we continually evaluate opportunities that will provide the most attractive risk-adjusted returns for our shareholders. That includes repurchasing our stock, investing in internal growth opportunities and evaluating M&A and some strategic partnership opportunities that would drive our scale and accelerate our growth strategy.

Matt Glover: Thanks, Dave. Next question. When do you anticipate Aware ID contributing to top-line revenue?

Robert Eckel: Yes. Thanks for the question. Aware ID nominally contributed to our top-line in Q4. But I’d say it’s important to note that the focus is on ARR. So that’s not exclusive to Aware ID in its deployment of SaaS. So our ARR will continue to have varying degrees of maintenance, subscription and SaaS makeup as we provide the fulfillment model that’s of choice to our customers. So — and this flexibility is central to how we stand out from the others in this space. So we offer a full portfolio of solutions and however they want it to be deployed in several ways that best meets their man. So it’s important to know that it’s — we’re looking at the ARR in particular, across the deployment methods.

Matt Glover: Thanks, Bob. What was the number of Knomi transactions in Q4 as well as in 2022?

Dave Barcelo: Yes, I can take that. So this question has popped up a couple of times. And while our Knomi transactions continue to grow each year, we believe that recurring revenue is the best metric to track the continued adoption of Knomi and our overall company’s transition into a subscription-based platform company. Because now we’re selling a mix of transaction-based, user-based and device-based subscriptions. So the transaction count would minimize our overall Knomi momentum. It’s all encapsulated in recurring revenue. And in 2022, our recurring revenue totaled nearly $10 million or more than 60% of our total revenue for the year, which is an 80% increase from 2019 after which we started this transformation.

Matt Glover: Thanks. Dave. Next question. Is Aware working on software for the AI market? If not, do you plan to in the future?

Robert Eckel: Yes, I’ll take that Matt. Aware’s artificial intelligence or AI and deep learning are part and package to our advanced software solutions. And those are the ones we take to the market through offerings that can be on-prem or in the cloud. And Aware has and will continue to invest significantly in deep learning and with our team of in-house PhD scientists and engineers. So our extensive portfolio of platforms, frameworks and associated AI is used to vet improve identities and then protect them against known and emerging attack factors. With extensive access to operational data to train and optimize our portfolio, Aware is going to continue to use AI to improve performance of our offerings as well as introducing new features to respond to fast-changing security needs. This will enable organizations to take advantage of Aware innovations in extremely timely manner.

Matt Glover: Thanks, Bob. Another one for you. Please comment on your assessment of company performance. And over the next 3.5 years, what circumstances influence your expectations of the future? And would the company consider a merger or sale if suboptimal performance persists?

Robert Eckel: Thanks for the question. When I took over as CEO in September of 2019, the company was doing approximately $12 million of revenue and recurring revenue is around 50% of that total. The operating state of the business when I assumed the CEO position was far more challenged than expected and required significant restructuring to position the company for growth and profitability. Part of that initial challenge was that the company was a strong innovator but did not have product — did not have a product suite — it had integral hardened and proven components that made the sales process overly complicated. And on top of this, the company do not have a proven go-to-market strategy for subscription and it was not properly equipped to sell.

So if we fast forward three years, where it’s growing its top line by nearly one-third, while simultaneously grown our recurring revenue by two-thirds. So to put that in perspective, our annual recurring revenue at the end of 2022 was approximately $10 million or approximately 80% of the company’s total revenue in 2019. And we are able to achieve this business and technology transformation despite a global pandemic, which everybody knew about or knows about. And today, we have the right products, the right team, right strategy to scale our business to greater heights. And now that we have the foundation, our attention has turned to executing in sustainable ways that drive scale and improve profitability. While we’re all encouraged by our operational progress and business momentum, the Board continually evaluates all strategic options that will produce the greatest long-term value for our shareholders.

Matt Glover: Next question, what is the average deal size?