Q1 2023 Aware Inc. Earnings Call
Speaker 2: Good afternoon and welcome to Wearys' first quarter of 2023 conference call. Joining us today is the company's CEO and President Robert Eckle, CFO David Barcelo, and CRO Craig Herman, following the remarks with the opening call for questions. It's like to submit a question you can do so at any time using the built-in ask-a-question feature in the webcast player.
Speaker 2: says the major uncertainties and risks inherent in four-looking statements that manage what we're making today. Where wishes to caution you that there are factors that could cause actual results different materially from those it result indicated by such statements. These risks and uncertainties are also outlined in the company's SEC filings including its annual report on Form 10K and Corley Reports on Form 10Q. Any four-looking statements should be considered in light of these factors.
Speaker 2: Additionally, the call contains certain non-GAAP financial measures as the term is defined by the SEC in regulation G. non-GAAP financial measures should not be considered an 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 measure in the company's earnings release issued today. I would like to remind everyone that this presentation will be a-
Speaker 3: our results for the first quarter ended March 31, 2023. A copy of the press release is available in the Investor Relations section of our website. We are pleased that you could join us for this quarterly update on aware. On today's call, I will first discuss our financial and operational performance for the first quarter. Then I'll review the progress we've made positioning aware to address...
Speaker 3: I'll review our business drivers in 2023 outlook before we open a call for questions. Before I review our performance in current market dynamics in greater detail, I'd like to recap who we are and what we do for those of you who may be new to aware in our industry. Where is an identity platform partner working to enhance trust and an increase in
Speaker 3: needs as well as improve business efficiencies. Collectively our offerings address identity challenges of today while preparing for identity challenges in the future.
Speaker 3: Specifically, these offerings facilitate digital onboarding, authentication, and life cycle management of the user's biometric identity through proven and trusted multi-modal adaptive biometrics. Over the last 30 years, we've led with deep-rooted systems level, technical expertise, and algorithms trained on diverse operational data sets from around us.
Speaker 3: more than 20 countries and is protected by 78 patents and numerous trade secrets.
Speaker 3: We focused our technology to provide enterprise solutions for digital onboarding and authentication across verticals and to maximize business efficiencies. Those of you following our story for the past couple of years know that this transformation has been accomplished with significant shift towards recurring revenue. Our current recurring revenue of approximately $10 million in 2022 is not far off from the total revenue achieved in 2019 or 2020.
Speaker 3: on rebuilding the front end of the business and introducing our SaaS offering, we enter 2023 with solid momentum, supported by a growing market opportunity, a proven product portfolio, and an expanding partner network. During Q1, we enter 2023 with solid momentum, supported
Speaker 3: Greg went into more detail on our go-to-market strategies and partnership programs, but I wanted to touch on a few key wins first. Greg and his customer success team's potential truly started to be realized so far this year.
Speaker 3: Recently, they were able to secure and onboard an on-prem customer in under a month, a process that would have taken 6-9 months or more previously.
Speaker 3: The customer success team's ability to streamline the onboarding process, combined with the adaptability and out-of-box readiness of our biometric authentication solutions, gives us the confidence we can convert our pipeline.
Speaker 3: Despite the ongoing macroeconomic challenges, the industry has some interesting tailwinds and our pipeline remains robust with high quality opportunities. In conjunction with our pipeline growing quarter over quarter, we are also securing and activating new logos through shared partner resources. This is enabling us to generate increased momentum across our product portfolio, including Aware ID. Although revenue from Aware ID remains a nominal portion of our total revenue today, we remain confident in our ability to meaningfully scale its contribution.
Speaker 3: based on the interest we are seeing from the customers as we optimize our product market fit. It's worth noting that one of the many reasons aware continues to win in the market is because of our ability to listen to our customers and deploy our solutions at best fits their needs, whether that may be SaaS, hybrid or on-prem. Lastly, with our healthy pipeline reinvigorated efforts around customer success,
Speaker 3: strategic partnerships in unparalleled biometric authentication solutions, we believe we are well positioned to capitalize on a growing global biometric industry.
Speaker 3: Now before discussing our near-term business drivers and outlook, Dave will walk us through our financial results for the first quarter.
Speaker 3: before discussing our near-term business drivers in outlook, Dave will walk us through our financial results for the first quarter. Dave, over to you.
Speaker 4: Thank you Bob. Good afternoon to everyone on the call.
Speaker 4: million in recurring revenue was up 17% sequentially and 4% year-over-year.
Speaker 4: Looking at our operating expenses.
Speaker 4: in Q1 of last year, reflecting an increase in sales and marketing. Operating loss for the first quarter of 2023 was negative $1.9 million, an improvement from negative $2 million in the prior quarter compared to negative $1.3 million in the same year-ago period. For the first quarter of 2023, gap net loss totaled negative $1.6 million, or 7 cents per diluted share, compared to a gap net loss of negative $1.8 million, or 8 cents per diluted share in Q4 of 2022.
Speaker 4: a negative 1.3 million or six cents per diluted chair in the same year-go period.
Speaker 4: Our adjusted ABA-DOW loss for the quarter, which we reconciled to GAAP net loss in our earnings release.
Speaker 4: totaled $1.4 million, which compares to adjusted the EBITDA loss of $1.5 million in the prior corridor, and adjusted the EBITDA loss of $0.6 million in the same year-go period.
Speaker 4: We repurchased 191,000 common shares of stock at an average price of $1.79 per share as part of our previously announced share buyback program. Our strong cash position and no debt provides us with significant resources to weather any macro pressures, while at the same time it affords us with the optimal flexibility to allocate capital toward opportunities with high ROI potential to align with our long term growth potential.
Speaker 4: a $191,000 common shares of stock at an average price of $1.79 per share, as part of a previously announced share buyback program. Our strong cash position and no debt provides us with significant resources to whether any macro pressures. At the same time, it affords us with the optimal flexibility to allocate capital toward opportunities with high ROI potential, aligned with our long-term growth potential. To that end,
Speaker 5: This completes my financial summary. Craig will now discuss our enterprise sales strategy. Craig? Thanks Dave. It's great to be here with you all today. As Bob touched on, our partner centric go-to-market strategy continues to gain momentum. We're seeing more and more opportunities arise through our partner network. While at the same time our customer success team is actively collaborating with existing customers to expand deployments and increase our wallet share. To that end, a longstanding customer base and higher neural rates, which exceeded 90% in 2022, provides us with a significant opportunity to increase wallet share and overall customer lifetime value.
Speaker 5: To recap our strategy, our multi-channel partner focus involves expanding our base of ours, including local and regional integrated resellers, system integrators, OEMs and distributors. In parallel, we're building a deeper network of consulting partners who can introduce, recommend and add aware services and solutions into a larger ecosystem.
Speaker 5: for customers on a global or regional basis. The third leg of our partnership strategy is technology partners who can integrate our offerings based on target markets, vertical solutions, and marketplaces, which allows us to increase the accessibility of awareness technology to the partner's customer base.
Speaker 5: Well, I've already mentioned a couple of our key customer wins that resulted from our advanced product offerings and customer success team, but I would like to go a bit more in depth into these achievements.
Speaker 5: First, we are committed to gaining traction in the FinTech market. Aware is already a proven leader in fraud prevention as we are trusted by some of the largest financial institutions in target countries around the world. With our customer success program, streamlining the onboarding process and enhancing customer interactions.
Speaker 5: We are confident that we can capture meaningful market share in the Fintech space. Our next initiative is to continue expanding our partnership programs. As I touched on, with these partnership programs, we strategically seek out specialized partners that we can leverage to generate momentum for other biometric solutions as well as in other markets.
Speaker 5: A great example of this is our recent partnership with UQuad, where our Nomi technology has been integrated into UQuad's Middle East-based contract management platform. This is not only expanding Nomi's use cases, but also opening the door to future customers in the Middle East and surrounding areas. In line with extending Aware's footprint in the Middle East, we have a new technology
Speaker 5: marketplace, we are one step closer to accelerating adoption of our biometric authentication solutions in the space and expanding awareness reach in both the U.S. and Latin America.
Speaker 5: In particular, we are confident a wearable will excel in the Latin American market with our advanced fraud prevention technologies and demonstrated track record of success amongst major financial institutions in Brazil, U.S. federal agencies, and governments around the world.
Speaker 5: Overall, our Enhanced Enterprise Sales Strategy is positioning aware to capture new markets through multi-channel partnerships, broadening the capabilities of our biometric, authentication solutions, and global customer wins, with these initiatives in place and are accelerated on boarding process.
Speaker 3: To best convert our pipeline into tangible results and drive recurring revenue, we're focused on three key initiatives. First, to propel growth by focusing on scaling through partners and marketplaces. Second, to protect the base by retaining and expanding our core customers and business segments. And finally, to establish a where ID's product market fit through a targeted adoption and strategically selected industry verticals. As I've noted in the past, our business will continue to be subject to quarterly variations and financials due to timing of awards and adoption. So our emphasis remains on a full year outlook in performance.
Speaker 3: Looking ahead, our expectation is to grow total revenue and annual recurring revenue, or ARR, by at least 15% in 2023. We also continue to expect operating cash flow exiting 2023 to be neutral to positive, which means we will manage both inflows and outflows towards profitability while taking into consideration seasonal timing of cash outlays. As we work towards achieving our cash flow goals, we remain confident in our ability to deliver robust operational performance while we progress along our strategic growth roadmap to strong recurring revenue and sustainable future growth.
Speaker 3: We truly appreciate everyone's continued support and are excited about the future of our wear. With that, we are ready to open to call the questions. Matt, please provide the appropriate instructions.
Speaker 3: to support and are excited about the future of our wear. With that, we are ready to open and call the questions. Matt, please provide the appropriate instructions.
Speaker 2: Thank you, Bob. As a reminder, you can submit a question using the built-in ask a question feature in the webcast player. Please hold while we populate the questions. Dave, how should investors be thinking about operating expenses this year?
Speaker 6: Thanks, Matt.
Speaker 4: As I mentioned in my prepared remarks, our Q1 operating expenses were up slightly quarter over quarter. And as we talked a bit on last call, we expect to run around $5.5 million each quarter during 2020-30. This excludes nine cash items, Amrization Appreciations.com.
Speaker 4: So as the target getting close to positive cash flow, we expect the optimal some might as a cost structure rather than continue to invest.
Speaker 4: Thanks, Dave. Another one for you. What is the progress on the share repurchase plan? During the first quarter, we repurchased about 191,000 shares. That was about 1% of our our same-sex shares and average price. This quarter was the buck 79.
Speaker 5: Next question, can you provide an update on the cloud Avis contract you mentioned last quarter? Yeah, thanks for the question. Yes, we anticipate the particular contract will go live this summer. So while we can't formally announce it right now all the details, we are excited to get this customer onboarded and in the cloud with Avis. It's a large scale biometric ID and deep location service.
Speaker 5: This contract will have a positive impact on recurring revenue as we continue our transition to a platform company.
Speaker 5: As we've highlighted previously, keep in mind that our business is subject to quarterly variations in financials because of the timing of awards and adoptions. We are winning contracts every quarter, however some deals take longer to realize the revenue than others. Therefore, we are largely focused on our full year performance and outlook.
Speaker 2: Thanks, Craig. We've got a multi-part question next. Please clarify the implied revenue growth for 2023 Q4 of approximately 50% year-over-year under the stated assumptions of steady quarterly expenses for 2023 versus the direct guidance of 15% revenue growth for full year 2023.
Speaker 2: Should we expect zero to negative growth in the first three quarters in all of 2023 growth through a current in the fourth quarter? Yeah, thanks, let me unpack that a little bit.
Speaker 4: So, as you saw, we generated about $4.3 million in revenue in Q1. That was an improvement from the prior quarter and down slightly from Q1 2022.
Speaker 4: And while we don't provide quarterly guidance on how our revenue will be trending throughout 2023, we do expect the growth for the year to be at least 15% both total revenue and ARR.
Speaker 4: Now, if you look back, you can see there's some historical seasonality to our revenue, but the quarterly variability tends to be less than the 50% in this question.
Speaker 4: So, if I unpack a little bit further in the question you mentioned, implied revenue growth, and presumably that's based on a target of exiting 2023 as operating cash flow neutral.
Speaker 4: So along those lines, again, we don't focus on quarterly results, but I will note that our average operating cash burn across the last four quarters was right around a million dollars. So that provides you some guidance as to how much growth we have left to go before we can hit cash for the neutral.
Speaker 2: Great. Thanks, Dave. Next question. Can you discuss the technology roadmap for AWARE?
Speaker 3: Yeah, it's just to give you an overview of it. It's constantly evolving, expanding its portfolio.
Speaker 3: based on the current growth and emerging and future use cases. So in order to do this, we provide and apply artificial intelligence, machine learning to the biometrics to solve the complex identity management problems that we've had over for 10 years now.
Speaker 3: So to that end, we've advanced our technology roadmaps along multiple vectors. One of them is machine learning and AI.
Speaker 3: Another is data science and data engineering. Biometric modalities, face, voice, fingerprint, iris, and behavioral.
Speaker 3: Software engineering and applications, the infrastructure and deployment, methodology, whether it's on prem, SAS,
Speaker 3: and make sure we adapt to the customer's environment. Mobile applications and then non-viometric, where we have some several active programs looking at document authentication and document liveness, and then our deep research.
Speaker 2: group relative to new technologies. Dave, the next question is for you. How does commercial revenue compare from the prior quarter and year-to-year?
Speaker 4: Okay, good question. So as I mentioned in my prepare of arts, our commercial revenue counts for over a quarter of our total revenue.
Speaker 4: So that means in, well, specifically in Q1 in 2023, it was about 1.3 million. And so that's up about 5% or so from Q1 of 2022.
Speaker 2: Next day, the next question is for Craig. What is the current addressable market size and growth dynamics within a wears portion of the biometrics industry?
Speaker 5: Sure, the global market for biometric technology is expected to grow at a compounded annual rate of about 20%. This will reach a total addressable market of approximately 71 billion by 2027.
Speaker 5: There are several factors that are driving demand for biometric technologies, including new government regulations, business need for convenience and operational efficiencies, as well as an increased rate of identity fraud and data breaches.
Speaker 5: With AWARE's out of the box readiness and lightning fast adaptability, we believe our company is well positioned to capitalize on this lucrative market opportunity supported by robust industry tailwinds and drivers. Another one for Craig. How do recent US government budget proposals impact AWARE's government business?
Speaker 5: includes additional funding for U.S. customs and border protection. To strengthen and improve security technologies, add in between ports of entry.
Speaker 5: Furthermore, the National Cybersecurity Strategy and the anticipated Digital FF Executive Order presents more potential opportunities for where. You are continuously monitoring the federal government's activities in the space and submit proposals regularly. The timing of awards and subsequent implementation can vary depending on the size of the project and a variety of other factors. Thanks, Craig. How has the macro environment affected the pipeline or do you still being pushed further out?
Speaker 5: Yeah, we talked about this last quarter about a few customers pushing out their start times. A number of government customers delayed going live, which shifted that revenue to the right. However, in Q1, we finally started to see some of these deals materialized as we have onboarded those customers. We believe we've weathered the macroeconomic storm, are beginning to see our resilience pay off.
Speaker 5: with a healthy pipeline of high quality opportunities around the globe. Next question. What kind of traction are you seeing with a Wear ID?
Speaker 5: Greg, you want to take this one since you're in the field? Sure. As Bob mentioned earlier, accelerating adoption and establishing the product market fit for AwareID is one of our key focuses for 2023. Leveraging our partnerships, like our collaboration with SoftwareOne, is crucial to our go-to-market strategy.
Speaker 5: When Aware ID enters the AWS marketplace later this summer, we will tap into the vast reach of the platform to generate strong momentum for the solution.
Speaker 5: Interestingly, with enterprise customers, Aware ID has been an intriguing offering to open doors to conversations that may otherwise have been closed. Some of these conversations lead to a proof of concept project with the prospects.
Speaker 5: Others lead to prospects realizing that a SaaS offering isn't exactly what they want and they're more interested in Nomi, which is on premise. The bottom line comes down to the depth and breadth of our portfolio, a strength that affords customers the flexibility to deploy world-class biometrics in the manner in which they need to. Thanks, Craig. Next question.
Speaker 4: what are the company's capital allocation plans in 2023? I'll take that Matt. We ended the quarter with about $27.3 million in cash and marketable securities. In Q1, we continue to take advantage of the increasing interest rates in the broader market.
Speaker 4: And we also progressed with our previously announced share buyback plan, as I talked to before. So overall in 2023 we are maintaining a robust cash position, no debt, and it allows us the strength to navigate any of the macro headwinds.
Speaker 4: So the flexibility to evaluate strategic opportunities that could help us drive scale as an organization and maximize shareholder value. Next question, when will you break out SaaS revenue?
Speaker 4: Thanks for that, Matt. As you've heard from our commentary, we're continuing to focus on building our SaaS base. Craig just went through that and while we don't anticipate SaaS revenue to be a significant revenue source in 2023, SaaS customers are being added monthly, momentum is building, all the goods.
Speaker 4: contract reaches the material amount, we will break it out separately on our inter-statement. Our Q-1 SAS Rev news were nominal.
Speaker 2: Thanks Dave, our next question. What are the target markets in typical use cases for a wear ID?
Speaker 5: Greg? Yeah. So where we're really focused with Aware ID right now is, and also the financial services industry, which is where we've had a lot of traction success with Nomi. We're really focused on more FinTech, mid-market credit unions, banks.
Speaker 5: on the financial services side. We're also really starting to see a lot of traction across the education market and certifications. So online certified certifications to prove that someone taking the test is the actual person. This has gained more and more as people are doing more contract work and a lot more remote work.
Speaker 5: And then finally, those two are really online, but then we really see the offline world of access control really starting to take hold with some recent opportunities that we're going down the path with. The ability to be able to easily implement
Speaker 5: a where ID without a lot of resources and then have full biometrics to use in buildings, rooms, etc. It's really gotten some traction lately.
Speaker 2: Next, Greg, our next question. How long does it typically take to get a new customer operational with a Wear ID, bio-SP, and know me, respectively?
Speaker 5: Sure. So, this is really the uniqueness of what we do. So, Aware ID really can take days to set up and running. And again, it's low code, it's in the cloud. Gnomeo and Bio SP are typically much more customized.
Speaker 5: to the person's companies infrastructure, what they're looking for, their specific workflows, and other things that we're connecting into. So in some cases, we're a part of the overall solution. In some cases, we are the solution. So in those cases, that can take, you know, again, months.
Speaker 5: to do a full implementation and scope out. And that's why we're really excited about the ability to marry Aware ID and Nomi so that the world isn't one size fits all and we really do have solutions that fit what customers need right now. And so it really does depend on the implementation and the customer.
Speaker 2: Our next question is for Dave. The language, achieve neutral to positive operating cash flow exiting 2023.
Speaker 2: Please for the sake of absolute clarity confirm this does not include any balance sheet driven from interest received.
Speaker 4: Yeah, let me provide a little color on this. We say positive operating cash flow exiting 2023 because at any given time going forward.
Speaker 4: That's the reason we worded as exiting 2023. Not every quarter will be the cash flow positive. But we plan to exit with the revenues reaching the levels of our expenses in that ballpark so that we can achieve.
Speaker 4: are Q4 of neutral and positive cash flow, so it had nothing to do with balance sheet driven interest received.
Speaker 4: Relatedly, is there anything preventing the company from pursuing a tender offer in light of the present market valuation which ascribes nearly no value at all to the company's underlying business? Yeah, so with regards to the cash required to operate the business, I think I mentioned earlier our operating cash flow has averaged a usage of about a million dollars a quarter for the last few quarters, so you can use that to determine roughly how much it has cost us over the last year, and we are trending favorably. So with a cash balance of $27 million, subtract that out and you're going to get a $25 million
Speaker 4: So from there, you know, pursuing a tender offer, I mean, so in general, we are always open to any strategic alternatives that help the company. You know, there's nothing specifically preventing us from a tender offer. We are evaluating all opportunities as they're presented to us. Next day, the next question, how is the competitive environment?
Speaker 5: So I'll take this one. It really does align again with a few different things. So where ID, there is a large start of community. Very focused on biometrics where we are competing in that facet. We are competing again with some of the bigger players in the space when it comes to financial service.
Speaker 5: deal with competitors that we know based on typically the size of business, the market that they are in, and the geography.
Speaker 2: Thanks, Craig. At this time, this concludes our question and answer session. If your question wasn't answered, please email the AWARE's IR team at a-w-r-e at gatewayir.com.
Speaker 3: Now I'd like to turn the call back over to Bob for closing remarks. Yeah, I just want to say thank you for joining today's call and I'd like to thank all our employees, partners, and shareholders for the continued support.
Speaker 3: And you can learn more about our strategy. We have an updated investor presentation that's now available on our website. And we look forward to updating you on where's progress on our next call. Matt?
Speaker 2: 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 Wear's first quarter 2023 conference call. You may now disconnect.