Q2 2022 BIO-Key International Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and welcome to buy International second quarter Conference call.
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As a reminder, this conference is being recorded today Friday August well 2022.
I would now like to turn the call over to Jim Fanucchi Investor Relations. Please proceed sir.
Thank you. Thank you for joining our call presenting today are bio Key's, chairman and CEO , Mike T Pasquale.
Well as Alex wrote Jeff, who is managing director of bio key E. M E E and Biochemists D F O C C well.
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Words, such as anticipate believe estimate expect and plan or similar words, typically identify and express forward looking statements.
Such forward looking statements are made based on management's beliefs and assumptions using information. That's currently available pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
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 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 and.
And with that I would like to turn the call over to Mike Mike.
You Bill and thank you for reading our Safe Harbor. This morning, Bill is from our IR firm catalyst Global Kim Biddings Who's normally on the call is on vacation.
So again, thanks, Bill good morning, and thank you for joining our call today.
After my remarks. This morning, I will turn the call over to Alex Rioja to review our efforts in Europe , and the Middle East than C. C will provide financial highlights for the quarter and then we'll open the call for Investor questions.
The second quarter, what's the first full quarter of operating results from our swivel secure acquisition, which closed in March and its integration into bio key is proceeding well and according to plan.
Alex will discuss the business in more detail, but we expect it to make an important contribution to our 2022 performance.
It significantly expands our international team our operations, our customer base and our growth potential.
Our revenue for the second quarter nearly doubled from 2021, driven by a 75% increase in software license revenue, reflecting growth in our installed base of customers, including the benefit of swivel secure.
We continue to advance our core identity and access management business, both through inside sales efforts and our growing channel Alliance partner program, where Caf program.
Leveraging the cat model, we expect 50% or more of new sales domestically going forward to be sourced through partners.
One of our key partners this and tell us where we have a master agent referral relationship with a very broad reach.
We've had particular success with certain intelligence agents. So we're focused on developing those key relationships as well as working to finding more successful agents within the entellus. This universe.
We spoke on a panel with their channel partner event in Boston in Q2, and we continue to meet with their team to solidify joint marketing events and programs for the second half to continue to build on this relationship.
In the second quarter, we partnered with three <unk> technologies, a value added distributor of mobile security and identity solutions with a network of value added resellers and M. S piece that expands the scope of our channel sales and marketing opportunities. This affiliation will enable bio.
Key to introduce a complete I E M solution packages to customers in their network, particularly within the financial services and local government markets.
Joint marketing programs developed in collaboration with three I were launched in Q2.
Just last month, we announced that dark steel technologies, they've managed security.
Security services provider or M. S. S. P. In Orlando had selected our portal guard identity as a service platform to provide its customers with enterprise grade identity authentication security for access the desktops critical business applications and data.
<unk> steel delivers enterprise class security cyber security solutions to small and medium sized customers expanding the reach of our solutions.
Also in Q2 bio key joined the Amazon Web services partner network, a global community of partners, who leverage AWS to build solutions and services for customers.
<unk> now also has access to the AWS S. I S. B accelerate program a co sell program for companies that provide software solutions that run on or integrate with AWS.
Co selling not only provides <unk> with more opportunities, but also can result in better customer outcomes, given the mutual commitment from partners like AWS and bio key.
We continue to increase the penetration of our flagship portal guard solution within county, and municipal government agencies, higher education institutions and businesses and enterprises.
Portal guard resonates as a high value easily deploy I a M solution that addresses increasing security threats of a hybrid workforce and users that require access to critical data applications and information from anywhere.
Its feature set includes workforce and customer multifactor authentication and identity bound biometrics, which is a big differentiator that bio keep provides single sign on and self service password reset options that support complete enterprise grade.
I a M strategies.
Customers recognize portal guards flexibility and unique kept the capabilities, including support for 16 different multifactor authentication methods, including as I, just mentioned our industry, leading identity bound biometric capability.
New customers include a city in Texas that selected portal guarding Q2 to strengthen its overall security posture and effectively respond to evolving cyber threats as you may be aware cyber attacks against municipalities have increased in the last year not only in terms of ransomware for profit.
But also to disrupt critical infrastructure, which school districts city halls, and police departments. Among the most vulnerable counties and other local government entities are choosing portal guard to provide strong multi factor authentication access management and compliance with insurance.
Laminates.
This new customer relationship in Texas was secured by Dallas I T consulting firm <unk> through and tell us. This.
In Africa, we have forged a new partnership with a company called E Transact, Nigeria plc for equipping its mobile money agents that along with our Sterling Bank Spectre relationship will accelerate the deployment of our solutions in the second half of the year.
Separately, we are awaiting commencement of a voter registration project that is expected to require 2000 of our pocket 10 devices.
We also recently secured application programming interfaces or Apis for key access from the National identity Management Commission or NIM see in Nigeria for verification of all national identity numbers.
In summary, we anticipate a rise in deployment of our hardware transactional software and partner relationships and Africa, There's an incredible demand for mobile security solutions across the continent, and we are front and center with the right technology and relationships to monetize this opportunity.
<unk>.
It certainly has taken longer than we believed but we remain very bullish on our prospects in Africa.
Switching to product development by Okie remains committed to continued innovation and new product development, such as our Q2 launch of important updates and enhancements to our mobile <unk> solution.
Mobile what is currently the only multi factor authentication mobile app that integrates the power of identity bound biometrics with other authentication modalities, allowing customers to build a more complete and secure multi factor strategy.
Mobile lot supports palm scanning with our Pompe positive solution and facial recognition now with arc based positive solution empowering mobile devices to integrate with our portal guard offering.
Mobile App also supports Apple face I D touch I'd D and Android biometrics as well as push token authentication. These.
These enhancements make mobile app much more powerful and even easier for customers to meet their increasing authentication and security requirements.
I'm proud to say that <unk> received further recognition in Q2 with a number of industry awards, including those for our portal Guard solution mentioned in today's press release.
But there were a couple of individual leadership awards that I want to acknowledge one is for our very own Merrill of Koos, who received the gold global CTO of the year Award for security software in this year's I T World Awards.
And Kim Biddings was named as channel reseller network or CR and women of the channel list for the second year in a row.
Congratulations to both mirror and Kim and to the entire biotech team our employees and staff that play an integral role in our success and industry recognition.
<unk> has built a strong base of product and service offerings and an expanding base of partnerships to address the growing global demand for organizations to protect their data information systems with strong cyber security solutions.
We continue to see expanding opportunities to grow our business globally, driven by compelling security solutions that are scalable easy to use and deploy and cost effective.
Protection begins with securing an organization's digital borders with strong but user friendly I E. M solutions. Our portal guard platform meets this need providing a strong customer value proposition with an expanding array of cutting edge authentication solutions.
We will continue to build on our solution set both internally and via value enhancing M&A opportunities that could also expand our customer base or our sales and marketing reach as we have done successfully over the past two years.
Given the building momentum we are seeing in our business, including with the integration of swivel secure Europe . It further progress advancing opportunities in Africa. We are reiterating our full year 2022 revenue guidance of $10 million to $13 million, 70% of which we expect to come from recurring <unk>.
Software license revenue.
Our guidance represents growth of approximately 100% or more over 2021 sales.
This outlook is supported by a solid capital position talented global management and product development teams as well as our expanding global sales marketing and channel partner footprint.
We're focused on building on our positive Q2 momentum.
For the balance of 2022, and the company is positioned to breakeven operations, our operating cash flow within this revenue guidance range subject, obviously to our mix of software and hardware revenues.
With that I'll now turn the conference call to Alex ROE Hot to discuss our European and Middle East business Alex.
Thank you Mike I'm very excited by the progress we added me might so far in integrating into by Yoki organization and maintained solid sales momentum. We are proud to announce that our sales team is already full operational with many years of knowledge and experience and eat into the solution and projects.
Eric not to him is covering Europe , not being more focus in middle east in that box and she'll definitely is we'll use his expertise on Africa and seek timber and new member will join this team with the responsibility of selling our product in Spain, and Latin America to support these <unk>.
Strategy, we boat.
Hi recognized sales engineered indeed, my yeah, we'd more of that than he has all the experience only in either entity.
Regarding support I'll eat my assault offer 20, 447, we'd two hours S. L. A and I became the leader in the sector.
By Yoki University will be a valuable in Q3 to train our channel we will offer and innovative online training solution that has helped the channel knowing our products, even approve eye exam and received a barcode guard certification.
Our international office are in Madrid, and Dubai, and we're going to expand soon to London, Frankfurt, Tokyo and sold off recap all of these combined with our strategy will make us a reference in the international market results are there and we.
Several new customers in the second sector in the second quarter five in Spain, one of which also operate in Germany and several new.
Middle East clients, including two in Saudi Arabia, one in Dubai, and National National International organization in the country and that we cannot disclose.
Our priority is to build the channel engagement program with partner levels from resell it to plateau, where our strategy is a handle percent channel.
Technologic partner Cheapies. Another subject that is part of our strategy and we are working close with ACP Sailpoint Okta and Microsoft on these map that our E. The entity bounce biomass I value to that product.
Portugal family will receive portal garb M S B and portal got C. I M to feel that demand of our customers and the market and we are already counting on opportunities.
Oh God M S B, which we'll present innovative unique features requested by the market is expecting to be released first then portable gods C. A M. We will focus on E shopping and on online banking authentication needs.
The products I've been defaulting month development with Gardner expertise and guidance well I've been working closely with us in other subjects to improve our product and the company.
All our products I'd been modify to be ready for the international market with high relevance for the EU, where we have the concern of G. D. P. R. Compliance last note, we overachieve our revenue projected for Q2 by more than 50% of.
Good signs are that we are falling the right strategy allow me now to turn the conference call to C C.
Thank you Alex.
I believe briefly with you the financials, which were released this morning and will be filed with the 10-Q on Monday.
Iot is Q2 'twenty two revenue nearly doubled to $1 9 million from 1 million in Q2 'twenty. One the period included 725000 of revenue related to the civil secure business that we acquired in Q1 2022.
Our annually recurring revenue from software licenses increased 75% to 1.2 million in Q2, 'twenty two versus Q2, 'twenty, one due to new customers and migrating portal guide customers from on premises to cloud based solutions, particularly in the higher education segment service.
Revenue increased 52% to 435000 in Q2, 'twenty, two with 74% representing recurring maintenance and support.
Nonrecurring services increased 82% to 111000 in Q2, 'twenty two versus Q2, 'twenty, one due to new customer customization and upgrade from on Prem to cloud deployment.
Hardware sales increased to 350, K and Q2 'twenty two from 43 K in Q2 'twenty one.
We do do to add on orders from existing customers in Asia, and one order from our pocket 10 product from a new customer.
For the first half of the air revenue increased 35% primarily related to the addition of swivel secure partially offset by lower hardware revenue.
Profit grew to one gross profit grew to $1 2 million in Q2 'twenty to 750 K.
In Q2, 'twenty one due to increased revenue gross profit margin declined from 76% in Q2, 'twenty, 1% to 63% in Q2 'twenty two due to growth in lower margin hardware sales growth.
And a decline in overall gross margin on license fees due to third party software required for the silver secure licenses.
Operating expenses increased to $2 8 million in Q2, 'twenty two from $1 9 million in Q2, 'twenty, one reflecting the consolidation of the civil secure expenses as well as new employees and related benefit.
We also incurred higher research and development and then generic expenses attributable to the costs associated with the development of <unk>.
Second enhancements and upgrades and are moving along at pace.
The company reported a Q2 'twenty two operating loss of $1 6 million versus an operating loss of $1 1 million in Q2, 'twenty, one due to operating costs, increasing more than gross profit.
Iot recorded a Q2 22 net loss of one 7 million or 20 months since this year as compared to a net loss of $1 2 million or 15 cents per share in Q2 'twenty one for.
For the first six months of 2022, Iot reported a net loss of $2 7 million or 34 cents per share versus a net loss of $2 million or 26 cents per share for the first six months of 2021.
Iot ended the quarter with $12 3 million of current assets, including $4 9 million in cash and cash equivalents 2 million of accounts receivable and $4 9 million in inventory net working capital excluding deferred revenue was $9 4 million and book value of total stock.
Stockholders equity was $13 6 million or $1 61 per share.
So far the first six months of 2022, but with $2 2 million of cash in operating activities as compared to $5, two and a year ago period, when we invested in inventory to support our opportunities in Africa.
And with that we can turn the call back over to the operator for investor questions.
We will now begin the question and answer session. Joe asked a question you May Press Star then one on your touch phone. If you are using a speakerphone. Please pick up your handset before pressing the pause button.
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Our first question comes from Jack when there are they with Maxim Group. Please go ahead.
Okay, Great. Good morning, guys appreciate the update.
<unk>.
I'll start with a few questions.
C C. I will finish with a couple of questions just I didn't catch the superbowl secure revenue and also what stock comp was in the quarter and I'll I'll come back to that.
Michael Thanks for the added color.
Just a question on the on the <unk> license result, it looks like it was a it was up it.
It was a big year over year, but it was down I think Q over Q.
Just trying to understand why that wasn't a bit more.
License we had.
A very large renewal from a customer in Africa in the first quarter that was valued over $600000.
And so that was just kind of a timing scenario. That's the reason that that was it was one big.
Single water that really drove you know the Q1.
License revenues. So we are still you know excluding that we're growing significantly but overall the overall growth you know year over year is really significant part of that is growth in our base as I mentioned in my prepared comments and also adding the swivel secure.
Business now is also significant for us and that will continue to grow as we go through the year as you know in Europe , and Alex will probably comment on this later Ah seasonality is significant obviously in the third quarter in the summer Ah things are slower, but they have a very big Q4.
For so overall, we expect our license revenue to grow significantly year over year and as I mentioned, approximately 70% of our business is contracted meaning it's a R. R. Right. Now we are we have moved now exclusively to a.
Subscription model and are not selling any perpetual.
Perpetual license anymore to new customers only fulfilling against our existing relationships with older customers.
Okay that makes a lot of sense I appreciate the color there and then.
On that point, it's good to hear the guidance is maintained.
Yeah.
This clearly implies a strong back half of the year I think your comments just now regarding Europe and the strength in the fourth quarter as a whole would you expect revenue to be stronger much stronger in the fourth quarter relative to the third quarter, then as for all of the revenue segments.
Well I think that's always the case right. So you know, we we would expect the fourth quarter just.
Because just the close of the year because of again the.
Scenario in Europe that I, just described we'd expect Q4 to be certainly stronger than than Q3, but we do also expect Q3 to be a good strong quarter for us. So if you look at are you now, saying that the year will be back end loaded we've done approximately let's say $4 million in revenue in the first half.
And to hit the minimum of our guidance range of 10, we'd have to do $6 million.
You know again, 70% of that contracted.
I think we're in a pretty good position to be able to achieve or overachieve those numbers.
Okay, Great and then just maybe one more it sounds like you have some more activity going on in positive developments with Africa can you just remind me of.
You know maybe how your guidance.
Incorporates your your two did two existing African contracts and I think it was pretty minimal, but just an update there and maybe looking into 2023. What are your thoughts on are these africa contracts are ramping up thanks.
I think first of all you're correct. We have as you consider my comments around 70% of our revenue being contracted especially on the on the license and services side, we have very little in our guidance for Africa in 2022, I did that intentionally because it's taken us.
Quite some time right to get productive.
It's really happening right now and it's ramping significantly because of the relationships that we're building in particular with the financial institutions that are backing the procurement of all of this hardware that we ultimately will sell in the beginning and then creating a N a R R or recurring revenue stream for transactional.
Fees that will start this quarter. So I think we're going to see that business ramp into the second half we do not have a lot built into our guidance for 2022, and 2023, I think you're going to see a significant significant increase in revenue against the two big Con.
Tracks that we have as well as some newer.
Relationships that we're building, but you know what we're really after we we've always said this the hardware is episode so you sell the hardware to facilitate.
The transactional business, that's really what we're after and being able to secure transactions across the agency model in Africa, and not just in Nigeria, but in other countries as well is really important for US also we have we continue to build on our partner network in Africa.
And where you're going to hear a lot more about that in the coming weeks and months, but in particular, we have a partner that has a contract for a large voting registration program in a country in Africa, and so there's quite a bit of hardware associated with that particular contract that will.
Come through bio key as well as software to support it. So we remain really bullish on that market. You know, it's it's it's in emerge it's probably the most significant emerging market.
On the globe and for the next few years are also securing.
You know all kinds of transactions banking health care insurance.
There's government type access.
That's just going to continue to grow and grow and grow also on the other side of the business Alex.
Given that we now have an office in Dubai and are are serving the middle east out of that office, we will begin to proliferate the sale of portal guard across many of the countries in Africa through the initiatives and efforts that Alex will be kicking off in the next quarter as well.
Okay, great lot of helpful color. There I appreciate that and then maybe just lastly cc. If you have it on hand could you. Please remind me of the scalable secure revenue and then what stock comp was in the quarter sure. So the.
<unk> was 725000.
85% software and the rest services.
And the share based comp with a 84000 for the three months and 193000 for the six months.
Great I appreciate that alright, guys thats. It for me Thanks a lot.
Thank you.
Thank you Jack.
As a reminder, it seems you have a question. Please press star then one can be joined into the queue.
Our next question comes from Darren <unk>, a private Investor. Please go ahead.
Hi, guys.
Hey, Uh huh.
How much of the 350, K and hardware sells a was for Nigeria if any.
About 100, and or so 120000 off the top of my head.
Got it.
Did that come off the.
The original sale from last year, the 680 8-K or.
Is that.
No because you already took that revenue. So is it is that original hardware sale has that been moved into.
It's a different way to account for that where the consultants have to get work in making come before you get paid on that I don't quite understand what happened to that revenue.
I'll defer to Cc, but no that was new revenue Dan the 120, or so that I, just mentioned as new new sales and new revenue to us.
Two new partner customers.
Right. So yes. It was it was 105000 new customer.
For African project, but it was so.
Domestically and it has been paid for already so it's totally recognize that revenue.
Okay, but what happened what's happening with that 680 revenue sale or sale you took in revenues I don't know must be a year ago now.
So we are recognizing I mean, sorry, we are receiving cash monthly on that its.
Smaller on the smaller side now, but it's ramping up every month so.
Yeah.
Oh no.
They get paid on that okay.
I just noticed there was a 150000 reserve I was just wondering what that was for whether that was for that hardware or something but.
No that's actually for a bond that we have in Hong Kong.
We fully disclosed in the 10-Q.
I noticed 122 K in new debt was that first level.
Yes, that's a loan that they had but it was like we got a four.
During the pandemic they received the same thing government loan.
And we are splitting it into current and long term, it's getting paid over the next hill.
2026, basically so.
Yeah.
Maybe a question for Mr. OCA.
What's the percentage of our civil customers that have converted portal guide at this point.
We continue to operate as two independent companies.
That mean has not been converted yet and we expected that combustion going to be only see in the next year.
Yes.
I see.
And what what's your head count that's swivel now after the any reorganization.
And right now in swivel security Europe . We are 12 persons that mean, we are half of what we have before and the rest of the the strategy is clearly a bio key and that is where we are putting our focus.
I see thank you.
Questions Mike.
The margin on your license fees looks like it was about 70%.
Is that a reasonable number for the next couple of quarters.
Yes, yes, that's a reasonable number.
Keep in mind that the gross margin on the bio key portal guard licenses that are sold as much higher but remember with swivel that swivels secure and Alex's business, which is why again, you'll see us over the next year converting that base to bio key we still pay.
A license fee to the the mother company right. The mother company swivel secure so the margins are a little bit lower than I think she mentioned that in her prepared comments. That's why you saw the gross margin.
Gross margins across the board go down because of the mix of hardware, but more importantly, the license fee margin, just well, we'll tremor, a little bit because of that.
I got it.
A couple more questions here maybe.
The SG&A.
It looks like it grew about.
50% in the second quarter over last year and.
40 per cent for six months or so.
So the expense seems to be accelerating.
That nonrecurring or or is there something driving that increase in EM.
Where do you think that it'll settle out what what will be the growth rate in SG&A for the second half do you think.
Well I'll, let <unk> address the core.
Core question, and then I'll talk about the future, but go ahead C C.
Yes, so that is a full month of or a full quarter excuse me of the integration of swivel. So a lot of that in the SG&A is attributable directly to the swivel.
And our research and development.
Also has quite a bit extra in it for the development of mobile off so going forward I expect R&D to be reduced.
And SG&A to stay.
Where it is it's it's.
It's going to be level, we don't have any hiring in the second half of the year, except for maybe one more in sales and that's about it.
I see okay.
I think actually.
That's it that's it for I have.
Okay. Thanks, a lot.
Thank you Dan.
Again, I think a reminder, if you have a question. Please press star then one to be joining the queue.
Okay.
I'm showing no more questions at this time the question and answer the question with excellence.
I'll now turn the call back over to Murray.
Closing remark.
Thank you I just want to thank everyone for joining today's call. We look forward to updating you on our Q3 call in November in the meantime, we hope to see some of you at the H C. Wainwright Global investment Conference in New York in September .
We will be attending in person.
As always we will continue to provide regular news updates via press releases as significant develops happen significant develops happen within the business. Once again. Thank you for your time this morning and have a great weekend.
So.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Thank you.