Q3 2021 BIO-Key International Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and welcome to Bio key International's third quarter 2021 conference call. During management's prepared remarks, all participants will be in 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 16th 2021.
I'd now like to turn the call over to Kimberley Johnson <unk> Vice President of product. Please proceed.
Thank you and thank you for joining our call. This morning with me on today's call are biopsies, Chairman and CEO, Mike gave us squarely Chief revenue Officer, Fred Constantino, I can Sunday, Carlton Hey, J.
J J, managing director of Africa, and our CFO D C well.
I'd like to remind everyone that todays conference call and webcast may contain forward looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements.
Words, such as estimate project expect anticipate believe think plan may or will or similar words, typically identify and express forward looking statements.
Forward looking statements are made based on management's beliefs and assumptions made using information currently available pursuant to the safe Harbor provision 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 risk factors in the Companys annual report filed on Form 10-K, and other filings 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 such forward looking statements to reflect events or circumstances that occur after today.
With that I'll turn the call over to Mike de Pasquale.
Thanks, Ken Good morning, everyone and thank you for joining our Q3 call.
After my prepared remarks, I will turn the call over to Fred to review some of our sales initiatives followed by Kim again to discuss marketing.
And Tuesday, our managing director of Africa is on the call. He will discuss the current status of our African business and then she will provide some financial highlights.
We are very pleased with the growth of our core business in Q3, driven by increasing demand for our cloud based portal guard I dash identity access control solution.
We also continued building out our channel Alliance program, including a master agent referral partner program within Telesis, which we believe can contribute substantial new market opportunities as spreads to will I will speak to momentarily.
As I mentioned I've invited our managing director of Africa to date called J J to speak on today's call and to provide an update on our large scale projects in Africa, and why we remain very optimistic about the future contribution of these projects as well as other opportunities throughout Africa.
As you viewed in our Q3 release with the timetable of material revenues from Africa pushed forward to 2022, we've revised our full year 2021 revenue guidance to a range of $5 5 million to $7 million from our prior estimated range up eight.
To $12 million.
The midpoint of this range would represent growth of 120% over 2020 revenue.
Considering the success, we are achieving and building our base of recurring high margin software as a service revenue.
Along with our expanding base of hardware solutions supported by a strong financial position, we are very optimistic about our prospects going forward.
On our next call we plan to provide our outlook for our revenue and profitability goals for 2022.
Before turning the call to Fred I did want to mention that last year's acquisition of portal Guards parent company pistol start <unk>.
Has proven to be truly transformational for our company.
Providing a major boost to our management and engineering teams our growth.
And base of recurring revenue.
While also opening cross selling opportunities for our biometric solutions.
We have the pieces in place to rapidly accelerate our revenue and a very high margin business.
And I am razor focused on ensuring the momentum we have garnered over the past quarters continues into 2022.
The valuation multiples in the identity and access management business, especially multifactor authentication our COO.
Far greater than any other segment of the technology markets in general.
Our strong balance sheet patented technology and experienced management team provides significant upside for the company this quarter and beyond.
We continue to look for favorable tuck in opportunities to further enhance our growth potential and financial performance.
With that I'll turn the call over to Fred.
Thank you Mike.
For the past year or more we have been focused on building out a recurring revenue model that leverages our technological strengths.
What we referred to as identity as a service or I guess is that software as a service model. It's really just in recent quarters that we are starting to see the real potential of this model in our revenue performance.
We launched the cloud version of our political ads I E M solutions about a year ago, and it's been a strong growth driver for our business most new customers prefer the low upfront cost that I guess offers we also continue to migrate existing on premises software customers to the attractively priced cloud solution approximate.
10% about up about 200 active on Prem portal guard customers will be migrated to the cloud solution. This year and we expect this percentage to continue to increase going forward in 2022.
Oh God I that supports a wide variety of MFA, where multifactor authentication options, including bio key's core biometric and patented kept capability.
We continue to see strong demand and higher education County government and enterprise verticals that are dealing with dramatically increased security challenges related to remote access demand too.
Today more than ever uses of working or studying from home and outside the organizational firewall, creating a range of security and access control challenges that are well served by our solutions.
Earlier this year, we expanded our channel alliance partner cap program seeking to significantly broaden our global partner ecosystem and deliver natural new revenue opportunities. We now have 110 partners representing over 100% growth. So far this year, our cat program extend.
Our reach into both new and existing markets, leveraging the established relationships and unique expertise and specialization of our partners.
Given our partners' long and close relationships with many of their end customers. They are in an excellent position to introduce and resell value added bio key security products, particularly if we make it easy and incentivize them.
This program is really starting to deliver results and we believe it is an important growth driver for bio keep going forward.
We are particularly excited with the master agent referral partner program, we put in place during the third quarter within Telus is the nation's largest provider of technology services and solutions.
I a M platform is now the first such solution then it tell US. This has agreed to provide to their very substantial network of partners as Mike mentioned, we believe the entellus. This partnership is a major milestone for us as it positions by oki to substantially increase our access to customer opportunities of course abroad.
At variety of end customers.
Innovation and product development remains a core tenet of our growth strategy in Q3, we launched several new products, including our new mobile P. O S. CRO.
Our handheld biometric Lee enabled durable Android point of sale terminal.
The device enabled mobile in person commerce ideal for banking.
<unk> and aid workers health care uses providing secure I D verification for fraud free transactions.
We also introduced an all new line of biotech cryptographic vital to compliance security keys further expanding our range of multifactor authentication options.
A third significant launch in Q3 was our next generation <unk>, two compact USB fingerprint scanner embedded with new technology.
<unk> latest NIST testing algorithms and poop scanning image cap it capture end user experience.
Midyear, we launched our mobile App called bio key mobile App, which is equipped with palm positive touchless palm scanning technology for iOS and Android mobile devices. This app uses a device's camera fast registration and enrollment with secure biometric factors that enabled.
Insecure single sign on capabilities.
Finally, <unk> was recently certified by Great place to work, which is great on it because the award is based upon current employee feedback and we recognize that employee satisfaction is critical to our success and growth on.
On October 1st we launched a new employee stock purchase plan to offer additional opportunities for employees to participate in that growth.
Now I'll turn the call over to Kim Johnson to review other recent customer wins and marketing initiatives.
Thanks Brent.
As mentioned, we've had a significant customer announcements in Q3, Florida Orange County supervisor of elections office collected arc portal Guard I am platform, which provides secure multifactor authentication and access to voter data filed in the state This largest county, which builds on the opposite earlier.
Climate of bio Keith Pitts compliant fingerprint scanner solution.
Within the higher education sector, the University of Denver selected portal Guard and Oklahoma Wesleyan University also adding portal guard for secure and efficient access control to enterprise wide applicable Chen.
Portal Guard Ida addresses significant security challenges.
By studying and working remotely are I'd ask solution allows customers to move their off premise and benefit from the elimination of Capex and resources required to help us maintain a secure authentication system.
Subsequent to quarter end, we announced that American auto auction, a complete auto dealer service company based in Texas selected bio Keith Portal Guard Eidos platform Americas Auto auction is one of the fastest growing auction in the U S and selected by our key to enhance access security and support delivery of cloud death.
Stop applications and workstations from the public cloud.
During the third quarter, we ramped up our off site sales and marketing activity attending industry events, including the 2021 National Association of counties are Niko Annual conference and CIO Forum, where we participated in a panel discussing the importance of multifactor authentication and connect.
In Washington, D C, where we had three speaking engagements.
In recent weeks, we participated in several other events, including the 2021 Channel Partners Conference and Expo, where we exhibited with and tell us that.
We showcased portal guard and bio keys higher education expertise at the 2021 edgy cause annual conference in Philadelphia, and we sponsored the 2021 National Association of State Chief Information Officer Annual conference in Seattle.
In addition to these events. We also participated any policy working group with the international biometric and I Daddy Association IV I E. It's fighting profile pro fraud group and targeting legislative and other groups in support of the biometrics and security industry.
This working group has met with staff of Homeland security to engage support for our industry.
Other recent marketing efforts include offerings for lead generating educational Webinars. We also offered a white paper on cyber security and government with content syndication and Gov check dot com and we've initiated a Google AD program.
Through these and other efforts, we've been able to increase search engine optimization rankings for our website, yielding more and higher quality traffic Fred.
Fred covered our channel Alliance partner program, but I just like dimension that we also recently launched our partner web portal to support the program. This will give our cat program partners, a central location for resources training and a new deal registration process.
We try to optimize the ROI of our continuous marketing effort with clearly defined quarterly goals and analysis to keep focused on driving new business customer retention and brand awareness.
For example, recently we've increased inbound leads by 63% doubled our overall lead generation and made process improvements to maintain a high conversion into sales engagement.
Through these and other strategies, we believe we are making solid progress in expanding our brand and positioning <unk> for continued growth and success.
At this time I will hand, the call to today for an overview of bio key Africa.
Many thanks Kim.
Our large scale projects in Africa have finally gotten Knoxville stocks with huge support from Nigeria banking sector, and providing equipment finance to mobile agents across the nation.
Thus, allowing for the upscale adoption of biotech hardware and software technology for civil Leidy enrollments.
Financial inclusion of rural Unbanked underserved populations.
That will come to slower than anticipated progress our key large projects remain a tremendous opportunity for our company the.
The national babies in the month of October just published that the federal government of my Julia has through its national Social investment program and that's IP began training 1850 use across the country on using mobile point of sale terminals and fingerprint scanners for business, which is related to.
Contracted hardware and services provided.
Services biotech providing to help create jobs for 1 million young Nigerians overtime.
1850 is just the beginning we are planning to supply 50000 points of sale units, which would represent 16 million U S dollars.
Plus in recurring revenue from transaction fees.
We have delivered initial hardware shipments in Q1 of this year and now expect more shipments this quarter with the project expected to gain traction in 2022.
We have been receiving cash payments for initial deliveries and remain in close contact with the relevant government agencies and private sector partners and thus have the assurance that all contracts are supported by strong commitments to national programs with guaranteed co funding by the World Bank and widespread support of it.
My Kid nation sustainable development goals through financial inclusion.
We are pleased to finally be getting good traction in terms of business activity and revenue. In addition to these projects. We continue to pursue other opportunities in Africa, both related to government civil I D projects identity based payment services and other business enterprise opportunities through our contacts and partners in the region.
We believe that we are strongly positioned for these opportunities in Africa, which according to the World Bank and other experts represent one of the largest and most significant regions in the world for social economic growth and development.
Thank you all.
In my prepared updates regarding biotech Africa, I will now turn the call to C. C Welch, who will review our key financials.
Thank you 10 day.
<unk> Q3, 'twenty, one revenue increased 38% to $1.3 million from 943000 in Q3 'twenty.
The increase is primarily attributable to a 524000 increase in license fee revenues.
<unk> revenues increased 31% from 922000 achieved in our prior quarter Q2 'twenty one.
Our core business has gained momentum for.
For the first nine months of 2021 revenue increased 136% to $4 2 million from $1 8 million in the first nine months of 2020.
Nine months periods are less comparable due to the acquisition as well as the COVID-19 disruption in 2020 with the onset of the pandemic.
Q3, 21 gross profit increased to one point.
$1 million from 732000 in Q3, 'twenty, principally reflecting the growth in software license revenue.
Gross margin remained strong at 77, 3% in Q3, 'twenty one versus 77, 6% in Q3 'twenty with the majority of revenue coming from license fees, which tends to carry a higher margin than hardware and software revenue.
Operating expenses grew at a much slower pace than revenues coming in at $2 million in Q3, 'twenty, one or 10% above Q3 'twenty.
The increase is mainly due to research and development and engineering costs, reflecting bio he's commitment to invest in new products.
As a result of the revenue growth.
Expense growth.
The company reported reduced operating loss of $1 million in Q3, 21 compared to $1 one in Q3 'twenty.
Through the first nine months of the year. The Companys operating loss was 3 million versus $3 8 million in the comparable 2020 period, which is an improvement of 22%.
We reported a net loss available to common stockholders for Q3, 21 1 million as compared to a net loss of $3 three in Q3 23.
Through the nine months ended September <unk> net loss available to common stockholders improved 64% to.
To 3 million from $8 4 million during the first nine months of 2020 due to reduced interest expense in 2021, and a reduced operating loss.
We ended the quarter with current assets of $7 3 million, including $9 6 million of cash and cash equivalents and no debt outstanding.
The companies.
Our prior quarter end.
Our June 32020, when we had $17 million I'm, sorry, 2021 had 17 million current assets and $11 five of cash and also no debt outstanding.
We've also invested about 5 million net working capital through the first nine months of 2021 to support our growth. These investments are primarily in inventory as we have prepared for increased business volumes and also try to mitigate supply chain issues supply chain issues are not specific to bio key but rather impacting men.
Businesses throughout the general economy.
Certainly any business that imports components.
And with that we can turn the call back to the operator for any investor questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys.
Anytime you question, that's been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Jack Vander Ark with Maxim Group. Please go ahead Sir.
Great. Good morning, guys appreciate the quarterly update.
Just a couple of questions from me Michael I'll start with a question for you I see that you guys doubled your your inventory levels I think to about $4 6 million at the end of the third quarter, which is exactly double from where you were last quarter wondering.
I'm wondering if I imagine this is because of the supply chain environment. So just wondering if you could share your thoughts on your inventory on hand.
And also if you could quantify the impact that the supply chain is having on your business just like it is having on every company in any industry. Thank you.
Yes, so first to start with inventory for sure.
Had to commit to a certain minimum of product in order to get it on the timelines that we believe were required and will be required.
To fulfill our obligations for our Africa contracts in particular.
That's one part there is another part we launched a new fingerprint scanner called <unk> two.
Back last quarter, and we are building inventory in and for that product as well, where we believe they will be very very strong demand. It's a very high quality, new updated REIT fingerprint reader.
As a personal device and we think the demand both in retail as well as an enterprise will be significant. So we've made some investments to be sure given the chip shortages that we've seen that we'll have the product that we need to generate the revenue for our business plan this quarter and.
Into 2022.
So that's for sure the issue as it relates to the impact for US well you know the majority of our revenues.
Our software right the the hardware business at least the significant hardware business that we expect in Africa hasn't really.
<unk> turned on yet so.
As it relates to the chip shortage, it's just exactly as I. Just described it's not impacting us from a software perspective, we're not.
Feeling any issues in that regard, but certainly on the hardware side, we have to be prepared and we have to have the product to fulfill our obligations and our requirements going forward. If we want to grow our business. We've got to continue to be that full service supplier, which we are.
And certainly we have the resources to be able to do that.
Okay I appreciate the color that makes sense.
Then obviously I want to turn to the 2021 guidance was lowered significantly.
Wonder if you could talk about the drivers of that obviously theres less revenue from Africa.
Let me ask the contracts at least that you were expecting but then again I also thought. It was you you had mentioned previously that Africa related did not relate or did not contribute a significant portion to that guidance, but so if you could just clarify that and then maybe does this imply that the rest of the businesses underperforming or in line with you.
Your expectations, just any color around the guidance. Please.
Yeah, actually I believe that our iam business, our identity and access management business, which includes our core biometric business as well as the portal guard business that we combined this past year is doing very very well it continues to grow quarter over quarter.
It is providing significant growth for us year over year.
So it's doing very very well and it's very much in line with our expectations as we started the year and we provided again guidance around the year I think where we're coming up short is the deliveries in both product services and software.
For Africa, and that's where the shortfall is right now that could turn on very very quickly I think as <unk> described the processes are now in place. It seems as though everything is lining up as it relates to financing to be able to move that business forward. So.
No we're doing very very well meeting our expectations on the iam size and in fact, I think we're going to exceed our expectations as we approach 2022 and beyond in that business and.
I tried to provide a just a little bit of color in my comments in my prepared comments, but if you look at the valuation multiples and.
The real I'll call it shareholder value that the company has the potential to produce its clearly in that space where high margin <unk>.
Software in particular software as a service recurring revenue is really grabbing most of the high level multiples in the technology space and industry today, especially in security. So I think we're in the right place at the right time I think we are meeting our expectations I think we have the opportunity to win.
Seed our expectations as we March through the end of this year and into 2022.
Okay, Great and then maybe just one follow up as it relates to Africa.
It's good it's encouraging to hear that.
Theres definitely training going on just you know, it's a small amount of people just over a thousand but.
It's just good to see traction.
What does this mean I guess for your fourth quarter and early 2022.
Hardware shipments as it relates to Africa contracts are these.
Is there a definite or you're definitely going to ship hardware related to these contracts in this fourth quarter or is it still kind of playing it by ear.
We've taken a very conservative approach.
Two our Africa shipments for the remainder of this year as you can see we lowered our guidance considerably to take that into into account. So our expectations for the end of the year are not significant as it relates to shipments, but again that could change very.
Quickly, we certainly have the product as long as the payments. So they are in the financing is available we can shift very very quickly we have reserves and inventory some in Africa, and we have some in the far east ready to ship.
Once again the financing is in place.
Okay, great well I appreciate the quarterly update.
I look forward to speaking next time thanks.
Again, if you have a question. Please press Star then one our next question will come from Dan comments, a private investor. Please go ahead.
Hey, guys.
Does this mean, there's still no payment to the original I guess it was 600 educate shipment.
I think that was in the first quarter.
Hi, Dan Good morning, where no in fact, I think Tuesday mentioned in his prepared remarks that we are collecting cash. So the answer to that question is no. It does not mean that.
Did you collect the whole 680 or is this not the entire amount, but the cash is being distributed by the banks.
On I'll call it almost a weekly basis.
I see.
And so those bank guarantees I think you mentioned last quarter or are they in place and working and we're happy with them, yes slowly slowly but the answer is yes, absolutely that was our expectation as we ended.
The second.
Second quarter into the third quarter, and that's certainly happening now.
Okay.
How much of the.
How much of the $4 6 million in inventories for Nigeria can you say that.
Probably about three quarters of it.
Okay, and how much of the E. R is for us from Nigeria.
A R.
Have to revert back to Cc.
On the Q3 numbers C. Maybe you can add some color.
Yes, certainly not all from Nigeria for sure.
No about a third.
Oh, okay.
Hum.
The hardware margin looked about 45% if I'm reading it right is that reasonable going forward.
I think I could answer that yes, we think it depends on the product. So for example, our.
Our eco I D that we.
Manufacturers design develop build and manufacture ourselves will be will be about half will be higher some of the third party product that we buy and integrate and resell for some of the contracts may be in that range. So we think thats probably a good range.
Okay.
Our deferred revenue was up 22% just some housekeeping questions here.
Should I take that as a good indicator.
Again ill, let <unk> handle that one alright, yes.
Yes, you should take that as a good indicator we.
Are doing a lot of the E R R and we defer.
What we recognize ratably over the last of the year, but the first part.
We recognize that the bulk of it similar to our bio key perpetual licenses.
So yes, the deferred is good that's a continuation of the just the support factor of the recurring revenue.
Okay.
Do you see as long as I got you I know it was 450 K in prepaid expenses and increase our.
Can you tell me what that was for.
That's just.
The last bit of some of the hardware that we have that prepaid.
To ensure that the deliveries going forward.
So that's on top of the inventory kind of thing yes.
It's the last of its actually.
Yes, just the last of it and again some of that like Mike said is for our equal Ids, we have some of those in the works. We just have a couple of thousand right now that we're expecting to sell a fairly quickly. So we have some more in the Kitty.
Okay, Let me ask some questions about Nigeria here.
The.
Would you expect that.
Maybe this is for sushi I'm not sure I know firsthand what was your last name I'm sorry.
But.
Would you expect Nigeria to add like a portal guard web key type platform to the mobile P O S.
When you talk about expanding into some type of mobile payment system.
Absolutely that's something that we're certainly looking at them as we deploy these terminals across the nation by aggregates with the agents.
We're definitely looking at adding portal got as you know the security layer four agents access transactions and things like that absolutely yes.
I mean, that's that's a lot of that.
That number you mentioned, who sort of astounding 60 million of transactions.
Is that on top of the call.
Already announced $75 million for the contracts or is that part of that deal.
That's part of that.
I see.
And what's the chance that a competitor's product can be selected like other than portal Garter web T to offer such a system.
Okay.
Sorry your question again.
What's the chance that a competitor's product could be selected other than portal guard to operate in such a system.
I'm, sorry, so what where are.
That's absolutely possible, but what we're looking to do is with the terminals that were deploying that.
And that's supposed to come pre.
Pre installed with polo golf solution.
You know for the agents that we will be using beds.
So four four terminals that you know for the terminals that belong to the <unk>.
Supply is there's a remote chance that.
It will have about the solution installed them back a lot of them are using them.
Two factor authentication.
For security.
So, yes, that's definitely possible.
I see then.
Is that 60 million transactions for the entire ecosystem or is that.
Like something you might expect by Keith we'll see.
Oh, that's just from our terminals from biotech terminals that are being deployed.
It could certainly be a lot more once we start with factoring the terminals of other suppliers.
But there's no guarantee that they will want to take a polo golf solution from us at this point, so thats just for our terminals.
Okay.
Let me ask a couple questions that Kimberly I guess co round Robin here.
Is there any kind of contractual obligation to tell us this to be the first offered I am platforms.
Oh, that's probably.
That's probably a question for Fred.
Fred is kind of managing the Intel's this relationship.
I'll, let him kind of take a shot at that but I didn't really understand it but go ahead, all right well.
The question is is there some contract traction lives obligations do you have to pay in telesis or.
What would you have to do to be the first offered I M platform or is it just there's no contractual obligation or remuneration or anything like that no. We are just their first to expand into identity as a service.
Okay. Good.
And I guess the last question would be on that 500 user call Center pilot are you guys mentioned I think that as Kimberly they talked about that last time.
How's that going and is there any chance for some kind of purchase in the fourth quarter.
Yeah that might be a question for me as well.
Yes, and it's going well on target and we expect ongoing rollout whether it's you know in the fourth quarter for next year a TBD.
Our next question will come from Richard <unk>, a private investor. Please go ahead.
Sorry, Richard.
So I'm very satisfied with the core business. However, it is still Africa and I called several times over the last six months.
And to get clarification.
I'm wondering if someone can tell me or is it a wild goose Chase in Africa.
You're betting the whole company on Africa, and particularly Nigeria bone for lotteries.
I'm going to Richard This is Mike I'm going to make a comment first and then I'm going to turn it over to Tuesday, I think we added an awful lot of color.
Our prepared remarks around Africa, and why we see it as a significant opportunity.
We are by far not betting the entire company at all.
On Africa, because as you see our core business continues to grow our core business will expand dramatically and our core business from a valuation perspective.
It has far more significant upside than the African business. However, we do believe.
Given our resources given our balance sheet, given the fact that we've got the right leadership, including Tuesday in Africa, we see being a leader there and taking kind of a first mover position.
And what is the largest market opportunity on the planet today makes a lot of sense for us and so no. It is not a wild goose chase and by no means are we betting the entire company on any one single component of our business. So I hope that helps.
At this time the Q&A session has ended I will now turn the call back over to Mike Dipasquale for closing remarks.
Thank you I want to thank everyone for joining and participating in today's call. We look forward to updating you on our next earnings call and as always we will continue to provide news and updates in the interim as significant developments occur again. Thank you for your time today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.