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

Aware, Inc. (NASDAQ:AWRE) Q4 2023 Earnings Call Transcript March 12, 2024

Aware, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Matt Glover: Good afternoon, and welcome to Aware’s Fourth Quarter and Full Year 2023 Conference Call. Joining us today is the company’s CEO and President, Robert Eckel; Principal Financial Officer, David Traverse; 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 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.

The 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 results and uncertainties are also outlined in the company’s SEC filings including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time Aware undertakes no commitment to update or revise the forward-looking statements whether as a result of new information future events or otherwise except as required by applicable securities laws.

Additionally this call references recurring revenue, annual recurring revenue and adjusted EBITDA, which are non-GAAP financial measures as the term is defined by the SEC in Regulation G. Non-GAAP financial measures should 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’d like to turn the call over to our 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 reported our results for the fourth quarter and full year ended December 31, 2023. A copy of the press release is available in the Investor Relations section of our website. 2023 marked a record-breaking year for Aware as we began to see the impact of our successful transformation to a recurring revenue and subscription-first business model. Our financial performance reflects our continued efforts to drive sustainable growth by prioritizing annual recurring revenue, focusing our go-to-market strategy, enabling our partner ecosystem, accelerating product market fit and optimizing our organizational structure. Our strategic execution yielded markedly improved results in line with our expectations for 2023.

See also 15 Biggest Telecom Companies in the US and 10 Best Alternatives to Amazon Echo and Alexa.

Q&A Session

Headlining our success was 23% growth in Annual Recurring Revenue or ARR bringing our ARR to $12 million, an impressive level especially when you consider where it was generating approximately $12 million in total revenue in my first year of this transformational journey 2020. Our total revenue now after 14% year-over-year growth to $18.2 million marks the highest level since 2016. Furthermore, we have momentum. In Q4, we generated $3.7 million in recurring revenue reflecting a 40% year-over-year growth. These achievements propelled us to achieve the highest level of annual recurring revenue in the company’s history and establish a strong recurring revenue base for 2024. Moreover our focus on cost optimization and operational efficiency has not only strengthened our financial position, but it also positions us for sustainable growth.

We do still continue to see long sales cycles and did have net income negatively impacted in the quarter by a $2.7 million write-off related to a March 2022 $2.5 million investment in Omlis Limited. Overall, we did see a significant reduction in cash burn in the year underscoring our commitment to financial prudence and sustainable growth. Craig and his team have demonstrated their ability this year in securing valuable clients and strategic partners, laying a solid foundation for future scalability. While I’ll defer to Craig to dive deeper into our go-to-market strategy and key customer wins for Q4 and 2023, I’d like to highlight a few recent wins. Notably, in Q4, we onboarded several new clients in our core geographies, including a prominent technology provider in Argentina, a leading tech company in Dubai and a Turkish bank.

These successes emphasize our commitment to expanding our global footprint and forging impactful partnerships across diverse markets. Furthermore, our dedication and focus on enhancing our partner program, which was officially launched in the third quarter, remains unwavering. In recent months, we have successfully integrated Avanza Solutions and Serban Group into our partner ecosystem. These strategic alliance, are poised to bolster whereas market presence in our target verticals spanning North America, LatAm, Europe, Northern Africa and the Middle East. In fact, our collaboration with Serban Group is already yielding promising results with three potential opportunities emerging as a direct outcome. This underscores our commitment to fostering mutually beneficial partnerships that drive growth and expansion across our focused verticals and markets.

As previously noted in our quarterly updates, it’s important to acknowledge that we do not intend to announce every contract secured or currently in progress. It’s worth highlighting that the world’s leading technology and resilient partnerships continue to identify additional opportunities in highly competitive markets. Although, there may be some fluctuations from quarter-to-quarter, we maintain a robust pipeline of opportunities in our backlog. Moreover, our solid foundation of recurring revenue serves as a stabilizing force mitigating the impact of these fluctuations and providing a strong basis for future growth. Before discussing 2024, I’ll turn the call over to David to take us through our financial results for the fourth quarter and the full year, and Craig to review our go-to-market.

David, over to you.

David Traverse: Thank you, Bob, and good afternoon, everyone. Turning to our financial results for the fourth quarter and full year ended December 31, 2023. Total revenue for the fourth quarter was $4.4 million, compared to $4.1 million in the same year ago period. The year-over-year improvement was largely due to higher software maintenance revenue. For the 12 months ended December 31, 2023, total revenue was $18.2 million, increased compared to $16 million in 2022. The increase in total revenue was primarily due to higher software license revenue. Annual recurring revenue or ARR as of December 31, 2023 increased to $12 million compared to $9.7 million as of December 31, 2022. For Q4 2023, recurring revenue was $3.7 million or 82% of total revenue to $3.7 million in recurring revenue representing a 40% year-over-year increase.

For the 12 months ended December 31, 2023 recurring revenue was $11 million, an increase of 13% compared to $9.7 million in 2022. Looking at operating expenses and operating loss, which include one-time actions in 2023 and 2022 related to the $2.7 million write-off of our investment in Omlis Limited in the fourth quarter of 2023, the $800,000 one-time gain in Q3 of 2023, related to the closeout of our contingent consideration related to our FortressID acquisition, as well as the $5.7 million one-time gain related to the sale of the company’s building in July of 2022. Our fourth quarter operating expenses were $8.9 million, up from $6.1 million in Q4 of last year. Operating expenses for the 12 months ended December 31, 2023 were $26.8 million, up from $18.2 million in 2022, which as mentioned earlier, included the one-time actions in 2023 and 2022.

Operating loss for the fourth quarter of 2023 was $4.4 million, compared to an operating loss of $2 million in the same year ago period. Operating loss for the 12 months ended December 31, 2023 was $8.5 million, compared to $2.2 million in 2022. Now, turning to GAAP net loss, which also includes the one-time transactions mentioned earlier. For the fourth quarter of 2023, GAAP net loss totaled $4.2 million or $0.20 per diluted share, compared to a GAAP net loss of $1.8 million or $0.08 per diluted share in Q4 of last year. For the full year of 2023, GAAP net loss totaled $7.3 million or $0.35 per diluted share, compared to GAAP net loss of $1.7 million or $0.08 per diluted share in the prior year. Our adjusted EBITDA loss for the quarter totaled $1.3 million, which compares to a loss of $1.5 million in the same year ago period.

The year-over-year improvement in adjusted EBITDA was primarily due to higher revenue. For the 12 months ended December 31, 2023, adjusted EBITDA loss totaled $4.6 million, an improvement compared to an adjusted EBITDA loss of $5.2 million in the prior year ago period. Looking at our balance sheet, we ended the quarter with $30.9 million in cash, cash equivalents and marketable securities, compared to $29 million at the end of the prior year, as we were able to collect on our IRS carry back claim of $1.5 million, and close out a long-term services project that was previously an unbilled revenue. As part of our previously announced share buyback program, which we extended to December 31, 2025, we repurchased 299,780 common shares of stock at a cost of $500,000 during the year.

Entering 2024, we are backed by a strong cash position and balance sheet that offers us the flexibility to evaluate all ROI opportunities with the potential to expedite our growth strategy. That completes my financial summary. And now, I’d like to turn the call over to Craig to discuss the progress we made on our go-to-market initiatives. Craig?

Craig Herman: Thanks, David. 2023 proved to be an important year for Aware, as Bob highlighted earlier, and as we expected it would be. Throughout the year, we remain steadfast in our commitment to scale through strategic partnerships, expand and retain our core customer base and business segments, and advance the product market fit of AwareID. These concerted efforts contributed to our exceptional performance and set the stage for continued growth and success in the future. During 2023, we further advanced our go-to-market strategy by strategically investing in key areas of our business. We prioritized front-end investments introducing a series of product enhancements across our portfolio in the latter part of the year guided by valuable feedback from our customers.

Additionally, the formal launch of our partner program in Q3 and the optimization of our organizational structure were pivotal in our ability to achieve our financial goals for 2023. These initiatives collectively strengthened our market position and propelled our success in the year. Since the launch of our formal partner program in the third quarter, we have been actively expanding and refining our partner ecosystem to maximize its impact. Central to this effort was the development of a dedicated partner portal where partners can access enablement and call marketing materials to increase their knowledge and selling power of Aware Solutions. Presently, our partner network is comprised of 65 active partners with two notable additions in Q4, namely Serban Group and Avanza Solutions among others.

These partnerships bolster our market reach and underscore our commitment to collaborative growth and success. In November, we added Serban Group to our partner program. Serban Group is a leader in integrated digital, technology, business consulting, and support and has deep connections with financial service firms, governments, and commercial enterprises across LatAm and Europe, which we expect to leverage to amplify Aware;s presence in these high-growth markets. In fact we already have three opportunities in conversation that stemmed from this new relationship. Another recent addition to the partner program was Avanza Solutions. With their regionalized trusted and specialized expertise across the Middle East, our collaboration with Avanza Solutions will be instrumental in helping us scale and maximize the opportunity in the Middle East region.

In fact economic data points to the Middle East becoming the fastest growing region in the world for financial services and e-commerce. This presents a tremendous opportunity for Aware. In addition to expanding our partner network, we successfully onboarded several new customers this quarter across key regions such as the Middle East, Latin America, and beyond. As Bob mentioned earlier, notable additions include a technology provider in Argentina, a tech company in Dubai, and another Turkish bank to our portfolio. Here at home, we have partnered to be the foundational technology for ITI, a company deploying self-serve DMV kiosks across the U.S. Furthermore, our collaboration with PeopleSERVE has significantly enhanced our global online presence and expanded Aware’s use cases.

By partnering with PeopleSERVE to combat proxy testing fraud, Aware is tapping into a vast market opportunity. PeopleSERVE administers millions of exams across more than 200 countries and territories, offering us an extensive platform to increase our market share and drive growth in this burgeoning sector. With our partnerships and customer relationships continuing to generate increasing momentum in markets across the globe, we are confident we have built a strong foundation that we can leverage to drive future ARR. As we enter 2024, our team’s initiative is centered on continuing to sharpen the focus of the product, market fit for our SaaS-based platform, driving incremental subscription base revenue, and leveraging our partner ecosystem to capitalize on our increasing pipeline of opportunities in our core and target markets.

I’d now like to turn the call back to Bob for additional discussion on 2024. Bob?

Robert Eckel: Thanks Craig. We’ve entered 2024 with $12 million in annual recurring revenue, which is approximately the same amount of total revenue the company generated when we began this transformational journey at the end of 2019. This shift from a short-term book-and-ship company to a recurring revenue machine is now beginning to pay off and will continue to pay off as evidenced by the positive cash flow achieved for the first time in years. Our go-to-market strategy in 2024 will center around our enabled partner ecosystem and targeted use cases for our robust Biometric Identity Platform. We will focus on sustainable growth for scale, both in expanding and upselling our existing customer base and in adding new logos. We’ll continue to prioritize quality ARR over onetime revenue.

And we’ll still anticipate quarterly fluctuations due to specific timing of awards. Furthermore, we will be maintaining our commitment to business efficiency as we build towards profitability. In fact, we further reduced our annual operating cost by more than $1 million in Q1 of 2024. This was made possible by leveraging our engineering resources and our efforts to optimize our product lines, go-to-market strategy and targeted product market fit. Of course, if an opportunity arises that warrants additional investment, we are ready and able to address it given our available cash resources. Building upon our solid performance and the solid foundation established in Q4 and 2023, we’re confident that Aware is well positioned to sustain its momentum and drive additional recurring revenue, paving the way for continued double-digit growth and success in the coming year as we build towards profitability.

We appreciate everyone’s continued support. And with that, we’ll now open the call to questions. Matt, please provide the appropriate instructions.

A – Matt Glover : Thank you, Bob. [Operator Instructions] First question. Craig, last quarter, you mentioned gaining momentum within the gaming space. Can you provide an update on the traction you were seeing?

Craig Herman: Yes, absolutely. Yes, we’ve been working diligently to expand our presence in the gaming market. We’ve been working with strategic partners in this space on potential co-marketing and integrated product opportunities. And will — Q4 events, we started 2024 with partner gaming events in January and a global gaming trade show in February. We have several additional events in the gaming space lined up for this year. We are also extremely excited by the launch of our WordPress and WooCommerce integration. These are platforms that are used by a large number of gaming and retail companies globally. WordPress is one of the leading website management platforms with tens of millions of websites worldwide. Our no-code WordPress plug-in sets the stage to expand in the use cases with other sites in other industry verticals as well.

By leveraging WordPress’s WooCommerce technology, our integration opens the door for any sites, in any vertical that use this market-leading platform to process e-commerce transactions. So back to the specific question in hand though, overall, the response to the gaming space has been enthusiastic about our offering.

Matt Glover: Thanks, Craig. A couple of questions about an article from biometric update published in May 2021 about Imprivata launching facial biometrics for health care through Aware and IDEMIA partnerships. First, is IDEMIA still involved or is it just Aware? Second, why has the rollout taken so long? And finally, is Aware compensated on a per facial recognition transaction or is it a flat fee?

Craig Herman: Sure. We partner in a multiple ways with different partners. And Imprivata is an integrated reseller of our facial recognition product. The go-to-market and adoption is the responsibility of Imprivata and the consumers of the Imprivata product. Our focus is supporting our partners in the way they need to go-to-market. We are also partnering with them from a growth standpoint based on our usage based pricing. So we are excited by the initial partnership and the direction that you sense.

Matt Glover: Thanks Craig. David, in Q4 the company generated $3.7 million in recurring revenue. How much of that was subscription versus maintenance?

David Traverse: Thanks Matt. So of the $3.7 million in the recurring revenue, about 40% which was about a 40% growth from the prior year quarter, the subscription-based revenue contributed about $1.5 million, while the remaining $2.2 million came from both new and prior maintenance contracts. And importantly this included the conversion of a legacy customer, to a multiyear subscription contract during the quarter.

Matt Glover: Thanks David. The next question, salable whereas normally system people search seems to be fully implemented with this brought online during the Q4 quarter. So one-time sale with residual annual maintenance recurring revenue stream is there potential revenue growth with this relationship? Thank you.

David Traverse: Yeah, great question, John. People certainly go live in Q4. This is not a one-time sale, but a subscription base engagement. That will grow as their business in a usable of Aware grows. We are very excited by the opportunity for future growth that we have with them, and partners like this, that are part of our recurring revenue growth model.

Matt Glover: Craig, another one for you, can you comment on the ID, disappointment product where has provided to you IMPRIVATA? Is this primarily where ID Recurring Revenue implementation, when do you expect revenue from the sale? Do you expect revenue from IMPRIVATA to become a significant revenue source? And lastly is Aware uniquely suited to enable DEA compliance or is this achievable with other authentication products also?

Craig Herman: This is the recurring revenue stream. They are leveraging, Aware products but not specifically Aware ID for disappointment. Strength of Aware is that our price can be configured for a wide range of use cases and specific industry engagements as well as this for either SaaS or on-prem solutions. The DEA compliance is the responsibility of IMPRIVATA in this situation.

Matt Glover: Thanks Craig, another one. How are you measuring performance in the partner channel?

Craig Herman: Yeah. As we’ve discussed previously our Ecosystem Hub, serves as a central resource for our partners to access co-marketing, sales enablement and training materials. In addition to the partner, — portal — excuse me, as a valuable resource for both new and established partners, the program itself also facilitates comprehensive metric tracking. To meticulously track, various metrics like the volume of active projects, pipeline level of each partner and the volume of new engagements the name a few. These metrics serve as key performance indicators enabling us to assess the effectiveness of our ecosystem continually. The addition of a Rev Ops resource last year has helped us considerably, on building out the reporting and process Mechanics.

We also begin a search for a head of partnerships to oversee the strategic arm of our go to market. I am extremely excited to announce that Todd Jarvis has joined us to lead our global partner efforts. Todd has had extensive experience building and expanding Global Partner Ecosystems with startups to enterprise tech companies. He’s engaged and started this week. We are looking forward to the impact he will have across our organization and partner ecosystem.

Matt Glover: Thanks Craig. Bob, in 2023 the company exceeded its expectation to grow ARR by at least 15%. Are you thinking about momentum in 2024?

Robert Eckel: Well, it’s a great question and I figured somebody would ask. So our strong performance in 2023 especially the 23% growth in ARR, really demonstrate the impact of our business model transformation and positions Aware for even greater success in the years ahead. So we’ve entered 2024 for a total $12 million of annual recurring revenue. And this is about the same amount of total revenue were generated when I joined the company at the end of 2019 and building upon the solid performance and solid foundation, the baseline that was established in Q4 and 2023. We’re confident that Aware is well positioned to sustain this momentum and drive additional recurring revenue. And we’re looking for this to pave the way for continued double-digit growth and success in the coming year, as we build towards profitability.

Matt Glover: Thank you, Bob. Craig, on the call, you highlighted a recent partnership with ITI which is expanding Aware into the testing market. Can you share what other industries are you targeting in North America?

Craig Herman: Absolute? I’m hearing you speak more generally regarding our approach to targeting, our targeting is really twofold based on geography and industry vertical. We have worked hard to establish a foothold in LatAm, North America and the Middle East. Based on geography, we focus on relevant industry verticals for the region. For example, as you know, financial services a target in LatAm and the Middle East. We’ve shared gaming as a target across all our target geographies. Of course, we have our government cost targets to build on strong foundations in North America and Europe as well. We continue to disrupt the law enforcement space in the US with our Aware Avis offer. We are planning to maintain our position and look to grow in a number of other verticals here in North America and around the world through our partner ecosystem and direct.

Matt Glover: David, Bob mentioned that you further reduced annual operating costs by more than $1 million in Q1 2024. What can you tell us about the recurring operating costs you anticipate?

David Traverse: Thanks, Matt. So, we continue to be focused on revenue growth and really specifically the recurring revenue that Bob mentioned earlier. But we also need — we’re also maintaining kind of the discipline in our spending. So with the changes we’ve made in the past few quarters, we’ll continue to drive towards profitability based on the timing of the actions over the past few quarters, including some that we made in the first quarter of 2024, we should begin to see the cost savings benefits of that million that Bob talked about in the second quarter of this year. And that was in addition to some of the cost saving initiatives we didn’t have second half of last year.

Matt Glover: Thanks, David. Craig, what can you share about legacy customer conversions?

Craig Herman: Sure. You know, first let’s start with me be really clear that we are actively looking to add new logos to our customer base and partner ecosystem. That said, as we emphasize our subscription first business model, our primary focus was on expanding our recurring revenue streams. During 2023, we intensified our efforts in this regard by leveraging our newly formed customer success model. Our team is the perfect position to show our customers, the advantage of a subscription-based model versus license. Feedback has been positive in all size and we are having increasing success converting legacy customers to subscription models. This brings more predictability for us, as well as our customers. In one example during the fourth quarter, we converted a significant legacy OEM to an annual subscription, which will continue to help minimize quarter-to-quarter fluctuations.

In 2024, we are incentivizing our teams to drive additional subscription revenue and take advantage of our cloud offer.

Matt Glover: Another one for you Craig. Last quarter you brought in or revenue operations expert. What changes has this had on the company’s sales process?

Craig Herman: You got it. I talked a bit about rev ops person earlier. And in Q4, we brought — we brought her in to help focus on upgrading our sales technology and processes to give us a 360 degree view of our customers. The impact so far has been tremendous. The advantages but all members of Aware can now see what is happening with our customers and partners in near real-time. We have also been focused on marketing to sales lead flow process and handoff which is critical for our growing business. This again is a combination of process and technology to ensure that we can track leads from first touch to close one opportunities. This visibility and the corresponding KPIs give us the ability to invest and focus in specific areas of the funnel to improve our follow-up, messaging and overall impact through throughout our lead funnel.

Matt Glover: And Craig, from a technology perspective, what areas are you focused on in 2024?

Craig Herman: We continually advance Aware’s technology by adapting to and anticipating market demands. Following numerous product enhancements this year, we are confident in the robustness of our industry-recognized biometric identity platform, capable of effectively addressing current challenges while maintaining top tier security and enhancing user experience. We are poised to further expand our reach and product adoption of our industry’s recognized biometric identity platform family of offerings through the introduction of bespoke tools tailored to the unique requirements of our target sectors. These include financial services, gaining access control and online certification and testing.

Matt Glover: Thanks, Craig. Our next question, could you see a positive impact to your business based on any of the proposed or potential solutions to the border and illegal immigration problem?

Craig Herman: Absolutely. This is where we’ve had global experience with this and it is hitting home more right now. But we have worked with a global government as well as the US government and where we saw other areas where there was a large influx of immigrants, we see transactions spike up. So the need for additional services, additional technology as well as our usage-based pricing which is based on transaction also goes up. So yes, this will have — typically will have an impact on our bottom line.

Matt Glover: Thank you, Craig. At this time this concludes our question-and-answer session. If your question wasn’t answered please e-mail Aware’s IR team at awre@gateway-grp.com. I’d now like to turn the call back over to Bob for closing remarks.

Robert Eckel: Yeah. I’d like to thank everybody for joining us on today’s call. I’d also like to thank our employees, our partners, our shareholders for the continued support that they provide. And as a reminder, you may learn more about our strategy in the investor presentation that’s available on our website. We look forward to updating you on Aware’s progress on our next call. Over to you, Matt.

Matt Glover: 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 for joining us today for Aware’s fourth quarter and full year 2023 conference call. You may now disconnect.