BIO-key International, Inc. (NASDAQ:BKYI) Q3 2022 Earnings Call Transcript

BIO-key International, Inc. (NASDAQ:BKYI) Q3 2022 Earnings Call Transcript November 16, 2022

Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the BIO-key International Third Quarter Conference Call. During management’s prepared remarks, all participants will be in a listen-only mode. Afterwards, listeners will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today, Tuesday, November 15, 2022. I would now like to turn the call over to Kimberly Biddings, Vice President of Product Marketing. Please proceed.

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Kimberly Johnson: Thank you, and thank you for joining our call. Joining me today are BIO-key’s Chairman and CEO, Mike DePasquale; as well as Alex Rocha, Managing Director of BIO-key EMEA; and BIO-key’s CFO, Cecilia Welch. I will remind everyone that today’s conference call and webcast and answers to questions include forward-looking statements, which are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected. Words such as anticipate, believe, estimate, expect and plan and similar words typically identify and express forward-looking statements. Such forward-looking statements are made based on management’s beliefs and assumptions using information available currently pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

For a complete description of these and other risk factors that may affect the future performance of BIO-key, please see the risk factors in the company’s annual report filed on Form 10-K with the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on forward-looking statements, which speak only as of today’s date. The company undertakes no obligation to revise or disclose revisions to forward-looking statements to reflect future events or circumstances after today. With that, I will turn the call over to Mike.

Michael DePasquale: Thanks, Kim. Good morning and thank you for joining our call today. After my brief remarks, I want to leave plenty of time for Alex to review our efforts in Europe and the Middle East and for Kim to discuss our sales and marketing initiatives. Ceci then will provide financial highlights, and we’ll open the call for investor questions. BIO-key has become a global company with a global brand. We have over 80 employees, including 36 in Europe, Middle East, Africa or EMEA region. And Q3 was our second full quarter that included operating results from our Swivel Secure acquisition that closed in March. The business and its integration into BIO-key is proceeding according to plan, though our third quarter was affected by the normal European seasonal slowdown due to the summer holidays.

We also saw continued customer delays in our large IT projects in Africa, and we did see some slippage of projects in our domestic business from Q3 to Q4, but mostly with county governments that must go through the RFP process. Despite these factors, we grew Q3 revenues by 6%, and year-to-date revenues rose 26% to $5.3 million, which is higher than our full fiscal 2021 revenue. At BIO-key, our success owes largely to our focus on innovation, which is core to our mission to expand passwordless and mobile IAM options. In Q3, we launched our updated mobile authenticator app, which we call MobileAuth. And we upgraded the user interface for our cloud-hosted PortalGuard as a service or IDaaS, which Kim will discuss in a few minutes. Regarding Africa, in Q2, we secured our – in Q3, I should say, we secured our application programming interface or API key access from the Nigerian National Identity Management Commission for verification of all national identity numbers.

Unfortunately, NIMC has had both technical and financial issues that led to delays in enrolling significant numbers of citizens, but we expect the situation to be resolved in the next few months. In addition to National ID programs, there was a substantial need for mobile security solutions across Africa. After two years of effort, we believe our African subsidiary is well-positioned with the right technology and relationships to monetize those significant opportunities that exist across the continent. Along with Gartner and Forrester, we believe the multifactor authentication segment of cybersecurity is one of the most attractive growth opportunities in the global software market today. As so much of the market is still mired in legacy solutions that have been compromised repeatedly.

Also, cyber insurance is becoming a mandate across public companies as well as small and medium-sized businesses that house consumer data. Insurance underwriters will not issue a policy to companies that do not have multifactor authentication in place. And despite the geopolitical and economic headwinds that almost every global business is experiencing, we believe MFA solutions will remain in high demand, and the opportunity for BIO-key to move up the value chain to larger opportunities is now presenting itself. Strong device and server-based biometrics is our unique competitive advantage. And it is getting greater visibility in the markets over the past two quarters. Again, Kim will speak to that shortly. To enhance the awareness and reach of our solutions, we’ve invested in an expanded team of direct and partner sales resources to complement our growing channel.

These investments are enabling us to build a growing base of recurring software-as-a-service revenue with strong customer references. We’re also building our pipeline of customer and project opportunities, some of which has progressed more slowly than anticipated over the past several months, which we largely attribute to macroeconomic factors. Nonetheless, we do expect a strong close to the year as some customers seek to put their IT budgets to work before it’s over. Given our results through Q3, we now expect full year revenue of $7 million to $9 million in 2022, representing growth of approximately 37% to 76% over 2021 revenue. Our outlook anticipates growth in recovering software license revenue to roughly 70% of our total or software license revenue, supported by hardware and services revenue, which are typically in support of specific software projects.

Although there’s a possibility we will see our African hardware deployments begin this quarter, we are not forecasting that to begin until Q1, 2023. With that, I will now turn the call to Alex Rocha to discuss our European and Middle East business. Alex?

Alex Rocha: Swivel Secure unit business into BIO-key International as on track, and we had been achieving our goals. In continuation with the previous quarters, I want to say that we met the target, and we continue to be a profit business unit. To expand our sales team, we incorporate as Senior Enterprise Sales Account for Spain and Latin America and Mercedes-Benz a General Manager well-known of the market with more than 10 years of experience. This team will be responsible for generating opportunities and win opportunities with the channel in Spain and Latin America. Our channel strategy involved BIO-key University that we speak previous. And we added a new partner program where the resellers have access to daily tools to help them position BIO-key product offer and identify opportunities, which has been built in the easy-to-use platform for sales and marketing teams inside our resellers.

We are selecting our add value distribution partner for Spain with presence in Latin America. The shortlist is retrieve and we expect to have the final decision next month. We have already 20 partners that cover 25 different countries, and we expect to achieve 100 in the next year. PortalGuard IDaaS in Europe is already fully deployed and the next project going to be designed for Asia, will allow us to start offering our product in that region where it exists a large demand for cybersecurity products. New customers, I’m glad to announce that we have one of the large European supermarket chains, a Saudi city council, the large European bus company, and another Spanish city as a reference. We have more, but that means the ones that we want to highlight.

Also closing — working closely with our partners and with our customers, we received a huge upgrade for sales our customer, a healthcare company and another one for insurance company. We are also working in large opportunities one of them for a large retail chain in Nigeria, where the project is to secure 120,000 employees. We’re going to represent more than €1 million revenue for the global project. Related to relevant opportunities, we are also working right now with the Central Bank in Asia and the National Banking Angola, and another in Ethiopia. In this case, the FFP is for five years with a, projection revenue of more than $5 million, plus six opportunities in government, telco, and private sector in Nigeria. Also, we have been achieved that we are already a strategic partner – for trust and beyond rust, and we continue conversations about extending that to SailPoint Omada and SAP.

BIO-key has been in one of the most relevant identity and access management event in London last week, where we attempt with our biometric solution and identify that several customers want to fill the needs of their projects. Not only the ones that they are at the new ones, but the ones that they have, the challenge they have right now, that legacy solutions cannot fit. For example, share computers kiosks and when the, company don’t deploy corporate mobile devices to the employees. And that is a very simple way for we show and explain what, is, the good return of investment. For this event, we bring 11 opportunities to fold and has been impressive for the quality of that lease. And we have been the only biometric vendor represented there, not related to the technology itself, but more with the business-oriented, we are studying a strategy approach to cyber insurance companies to offer the bundle for SMEs in the OEM sales model.

We continue to work hard in our PortalGuard MSP product, which, as you know, going to be the baseline for PortalGuard CIM with innovative functions and features that we expect to announce soon. We expect to announce again that we achieved our revenue target in the next call. And with that, I want to turn the call back to Kim.

Kimberly Johnson: Great, thanks, Alex. In terms of our customer deployment, we completed the migration of the University of Arkansas at Fort Smith and California Santa Rosa Junior College from on-premise solutions to our cloud-hosted PortalGuard Identity-as-a-Service IDaaS platform in Q3. By deploying our solution, our higher education customers are able to accomplish much more with their IT budget by eliminating the resources and costs of on-premise infrastructure and maintenance. Further, the large increase in remote access outside an institution’s firewall is better suited to our IDaaS solution than legacy on-prem architectures. Also in Q3, the Long Beach Community College District in California purchased BIO-key branded hardware tokens to support multifactor authentication for a portion of their student user base.

Outside of higher education, we also expanded our global enterprise franchise, adding a Dutch-based multinational conglomerate and a leading Saudi Arabia healthcare procurement provider. In October, a large Southwestern U.S. Auto Group selected PortalGuard IDaaS to safeguard consumer financial data. This and other customers are now seeking enhanced IAM solutions to support FTC compliance requirements for data protection by strengthening active security with multifactor authentication. The SEC’s updated Safeguards rule requires even nonbanking financial institutions such as mortgage brokers, motor vehicle dealers, and payday lenders to develop, implement and maintain a comprehensive security system to keep their customers’ information safe. Our PortalGuard IDaaS platform enables companies to provide comprehensive IAM capabilities and robust MFA methods, not only to strengthen their overall security posture, but also to ensure compliance with government regulations.

Also, six county governments in Kansas, Virginia, New Mexico, Florida, South Dakota, and New York selected PortalGuard IDaaS for improved data security as well as regulatory and insurance compliance. County government are facing a cascade of ransomware attacks targeting the public sector, threats that require enhanced IAM solutions like ours. We continue to partner with counties to improve their IM strategies, showcasing PortalGuard at the National Association of Counties or NACO Annual Conference in Q3, where I participated in a panel about communicating about cybersecurity across your county and cohosting a webinar in September alongside Niko’s CIO; and Adrian County, Missouri, a BIO-key customer on how counties can right-size their cybersecurity programs.

As demonstrated by customer deployments, we continue to advance our core identity and access management business, both through inside sales efforts and our growing channel alliance partner, or CAP program. We believe the CAP program’s global reach will be the source for 50% or more of sales going forward. For example, in Q3, we announced the Darksteel Technologies, a managed security service provider, or MSSP in Florida, selected PortalGuard IDaaS to provide its customers with an enterprise-grade IAM solution. Darksteel delivers cybersecurity solutions to small to medium-sized enterprises. MSPs and MSSPs selected PortalGuard IDaaS for its unmatched variety of options for the workforce and customer multifactor authentication with exclusive identity-bound biometric options as well as single sign-on and self-service passive reset to support their customers’ cybersecurity strategies.

Also in Q2, we announced a distribution partnership with an Israeli-based Multi-Point Group for Southern and Central Europe and the Middle East. Multi-Point offers not only distribution but also pre-sales analysis, training, and full support to resellers and customers of security and identity solutions in 15 countries. Adding quality partners like Darksteel and Multi-Point expands the reach of our solutions in important segments and regions of the marketplace. In terms of product development, Mike mentioned that we launched important updates and enhancements to our MobileAuth solution in Q3. MobileAuth is currently the only multifactor authentication MobileAuth that integrates the power of identity-bound biometrics with other authentication modalities, allowing customers to build a more complete and secure access management strategy.

MobileAuth supports palm scanning with our PalmPositive solution and facial recognition with our face positive solution and now also supports Apple Face ID, Touch ID, and Android biometrics, as well as push token authentication, which can all be used as factors as part of PortalGuard’s MFA. These enhancements make MobileAuth much more powerful and more convenient for customers to use when looking to exceed their increasing security requirements. We rolled out these upgrades at the Gartner IAM Summit in Las Vegas in August. The Gartner Summit gathers some of the most influential industry leaders and enterprise organizations in the IAM industry. This year’s theme focused on the adoption of the new IAM approaches amidst a great digital transformation and reliance on the remote business being experienced by organizations of all sizes.

It was a great opportunity for us to build brand awareness for MobileAuth and our IBB solution and resulted in six new enterprise opportunities that we are now working to advance. We continue to build our client relationship with Gartner, meeting with the leading IAM and market analysts during numerous inquiries and vendor briefing held in Q3. We executed a focused identity-bound biometrics marketing campaign in Q3, which streamlined our messaging and content, including an anthem video, updated website content, and cohesive design. Leveraging this campaign, we placed ads to IT B2B buyers on streaming TV and reached over 100,000 viewers, and produced over 2,000 website visits. Internationally, we hired the Spanish PR firm, , which has already booked five interviews in Spain for Alex with major TV and radio stations and had a buy line placed in Chief Security Officer or CSO Magazine.

In Q4, we expect to continue our Gartner relationship and to work with influencers outside of BIO-key to evangelize the IBB messaging. We have seven events planned, including our first international event, as Alex mentioned, IDM U.K., which happened just last week in London. Our current marketing initiative is a passwordless campaign, where we are again streamlining content and messaging around the elimination of passwords using BIO-key identity-bound biometrics as a phoneless, tokenless, passwordless option. Our channel focus is on our new partner portal and content that will help partners learn about our products and position them effectively to their customers. We are also revisiting our sales tools and continuing to meet with customers to capture more of their success stories and explore the value they experience when using BIO-key solutions.

Lastly, in October, PortalGuard received the Access Management Solution of the Year Award in the 2022 Cybersecurity Breakthrough Awards conducted by Cybersecurity Breakthrough. This is the second consecutive year PortalGuard has earned this honor. Computer Security Magazine in Britain also selected PortalGuard for their Computer Security 2022 Award in the Innovation Category, which is a well-recognized global award, especially in European markets. And with that, I’ll pass the call over to our CFO, Ceci Welch.

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Cecilia Welch: Thank you, Kim. I’ll briefly review BIO-key’s financial highlights for the third quarter. BIO-key’s Q3 ’22 revenue rose 6% to $1.4 million versus $1.3 million in Q3 ’21. Year-to-date revenues grew 26% to $5.3 million versus $4.2 million through the first nine months of 2021. Both Q3 and the year-to-date period of 2022, higher software and license service fees were partially offset by lower hardware revenue. Also the 2022 period included the results of Swivel Secure following its acquisition in March. Annual recurring revenue for the software licenses increased 5.5% to $918,000 versus $870,000 in Q3 ’21, reflecting an increase from the addition of Swivel and in addition to the new PortalGuard customers. Service revenue improved 17% to $372,000 in Q3 ’22, with the majority, or 81%, representing recurring maintenance and support.

Nonrecurring services decreased 8% to $68,000 in Q3, 2022 versus $74,000 in Q3, 2021 due to fewer upgrades from on-prem to cloud deployments versus the prior-year quarter. Hardware sales declined to $83,000 in Q3 ’22 from $110,000 in Q3 ’21 due to other MFA options offered with PortalGuard. Despite higher revenue, gross profit was flat at $1 million in Q3 ’22 versus Q3 ’21 due to higher costs for license fees related to the Swivel Secure software license. The realized gross margin declined to 71% from Q3 ’22 from 77% in Q3 ’21, also related to third-party license fees. Operating expenses increased to $3.3 million in Q3 ’22 from $2 million in Q3 ’21, reflecting a $1.1 million increase or – increase in SG&A expenses as well as higher research development and engineering expenses and SG&A.

Increases included costs related to the integration of Swivel Secure operations, increased trade show expenses, amortized expenses for Swivel share-based compensation, travel and wages and benefits for new employees, higher R&D related to higher personnel costs and product development, including the Q3 launch of significant enhancements and updates to our MobileAuth app. BIO-key reported a Q3 ’22 operating loss of $2.4 million versus an operating loss of $1 million in Q3 ’21 due to operating cost increases more than revenue and gross profit. BIO-key reported Q3 ’22 net loss to common shareholders of $2.5 million or $0.29 per share as compared to $1 million or $0.13 per share in Q3 ’21. For the first nine months of 2022, BIO-key reported a net loss to common shareholders of $5.4 million or $0.64 per share versus a net loss of $3 million or $0.39 per share in the first nine months of 2021.

The nine-month loss includes approximately $1.1 million of noncash expenses, of which $217,000 was amortization of intangible assets allocated through acquisitions, $294,000 of share-based compensation in addition to depreciation, capitalized contract costs, and other noncash expenses. BIO-key ended the quarter with current assets of $9.9 million, including $2.8 million of cash and cash equivalents, $1.8 million of accounts receivable, and $4.9 million of inventory. Net working capital, excluding deferred revenue, was $6.5 million and total stockholders’ equity was $11.2 million or $1.32 per share. And now I think we can turn the call back over to the operator for investor questions.

Q&A Session

Operator: Today’s first question comes from Richard Arnold, a Private Investor.

Unidentified Analyst: Am I on?

Operator: You are sir?

Unidentified Analyst: Okay, this is Richard Arnold. I’m 87, so bear with me while I remember a few things. A couple of years ago, I was told that $8 million was breakeven. And similar to what we’ve been told this year. I was told there was a signed contract for $75 million in Africa and that there were bank guarantees on the horizon? Having said that, it brings me to my question in this last quarter, we lost $2.5 million. Back when those African contracts were on the table, $18 million was raised. Now we only have $3 million. My question basically comes down to what is breakeven now. When is that expected and is there enough cash to last through 2023? Richard Arnold, thank you.

Michael DePasquale: Thank you, Richard, for your questions. So let me address – it’s kind of three parts. The first piece is Africa. I mentioned in my prepared remarks that we’ve seen delays in the key deployment of the projects because of the core agency that’s responsible for that in Africa. And so we’ve seen delays. We do expect those projects will deploy, and we do expect because we have a significant chunk of inventory. Ceci mentioned, we have about four – we have various segments of inventory for different products, but associated with Africa, about $4 million in inventory that cost that we expect to deploy. So some of our cash – a portion of the cash that we raised, obviously, has gone for that purpose. Also a portion of our cash went to two acquisitions.

We acquired two companies, one is PortalGuard PistolStar back in 2020, and we just closed in March on a transaction to acquire Swivel Secure Europe. Both of those were accretive to our earnings. They are profitable entities. They continue to grow. And so, we’re doing very, very well there. And it is also putting us in a position to be a major player in the access management space, in particular in multifactor authentication. Clearly, our breakeven has gone up because our expenses have gone up associated both with the acquisitions and of course, our marketing initiatives and trying to expand our business, as Kim described in her prepared remarks. So clearly, we do expect to get to breakeven, and we expect to get there certainly at the start or early part of 2023.

The third quarter, in particular, as it relates to Europe, is the slowest quarter with the slow – with summer months in Europe. And so this is our lightest quarter from a seasonally adjusted perspective. We expect, as I mentioned before, a strong close to the fourth quarter, and we expect a strong first quarter as well, which – again is just traditionally a stronger quarter in our EMEA business. So we do expect to get to breakeven, and we expect to get there early in 2023.

Unidentified Analyst: And Michael, please address is the $3 million cash that’s an until now enough to survive 2023 with the idea that you just lost $2.5 million in the last quarter?

Michael DePasquale: Yes, obviously, we have cash, and we have inventory. Obviously, we have to turn that inventory into cash, but we’ll absolutely have the financial resources to support our business through the end of this year and well into 2023.

Unidentified Analyst: All right, well my last question would be, is Mr. Sullivan happy with transition – he made recently as an insider, which was?