Q2 2023 Aware Inc Earnings Call
Yeah.
Thanks, Matt.
Good afternoon, everyone and thank you for joining us today.
After the market close we issued a press release announcing our results for the second quarter ended June 30th 2023.
Copy of the press release is available in the Investor Relations section of our website.
On today's call I will first discuss our financial and operational performance for the second quarter.
Next I'll review the steps, we've taken to drive growth and scale for aware.
Then our CFO , Dave Barcelona will provide details on our second quarter results.
After Dave's remarks, our CRO Gregg Herman will discuss our strategic initiatives to advance the company's go to market motions and increase sales.
Finally, I'll review, our key business drivers in 2023 outlook before opening the call for questions.
Like last quarter.
I'd like to start by briefly introducing who we are and what we do for those of you who may be new to aware in our industry.
Whereas an identity platform partner working to enhance trust in an increasingly connected world.
Our mission is to bound security and user experience through technology for the few and upscale.
We reduce fraud and enable compliance and security needs as well as improve business efficiencies through our offerings that address identity challenges of today, while preparing for identity challenges in the future.
These offerings facilitate digital on boarding authentication and lifecycle management of the user's biometric identity through a proven and trusted multimodal adaptive biometrics.
Over the last 30 years, we've led with deep rooted systems level.
Technical expertise and algorithms trained on the most diverse operational data sets in the world.
Our reputation in the biometric industry has earned his trusted spots with many governments and today our technology can be found in expanding in all three branches of the U S Federal government.
And more than 20 financial institutions and over 150 law enforcement agencies worldwide.
Our technology, which spans four technology platforms has been deployed by more than 60 partners and more than 20 countries.
It's protected by nearly 80 patents and numerous trade secrets.
And while we cherish our routes and work hard to maintain our loyal customer base. We have actively shifted the company over the last three years, our business model has changed our culture has changed.
Infrastructure is change in our target customers now include a growing portion of commercial clients.
These contribute to over a quarter of our revenue.
We focus our technology to provide enterprise solutions for digital onboarding and authentication across verticals and to maximize business deficiencies.
Our transformation has been accomplished with a significant emphasis and shift towards recurring revenue, which had approximately $10 million in 2022 and is continuing to build in 2023.
Now with that background and context, I'd like to discuss our operational and financial achievements for the second quarter of 2023.
In Q2, we focus largely on protecting securing expanding our recurring customer base through product enhancements and improving our partner centric sales strategy.
This year, we renewed our largest nomi customer for another three years.
And in Q2, we continued to expand the scope and size of that contract.
We also secured our largest E M E partner and their banking customers with our new upgraded biometric and identity verification platform.
And an additional use case along the way.
Lastly, as the quarter closed we signed a five year 5 million dollar contract with options up to $8 million, which include a facial recognition upgrade to our largest by OSB customer.
I'll, let Greg go into more detail on the progress we've made expanding the base, but I want to highlight a few more proof points of progress and success from this quarter.
We signed several quality commercial customers in Latin America and Turkey.
Furthermore, whereas wallet share overseas.
We've also continued our momentum winning avis contracts, having won two more Apis awards, one of which is our first cloud Avis award ever and a Miami Valley, Ohio.
And we expect these ava contracts to start generating revenue in Q3.
The new logo signed in Q2 are a testament to the confidence corporations and the governments, having a worse technology to protect both consumers and nations alike.
The key drivers behind our success, securing and protecting the base. This quarter had been our recently implemented customer success focus on processes, which Greg will talk about more in depth later as well as a few product enhancements, we recently rolled out.
With security challenges and evolving every day is critical we are constantly improving and adapting it wears technology to continue providing best in class security.
This quarter, we focus on development efforts reinforcing the capabilities of aware I DS facial authentication and.
Improving the Army's liveliness detection excellence and upgrading our orchestration to address new identity verification use cases with document authentication.
Given the enhancements to Gnome and aware I D. We are confident aware is well position to capture additional market share in both existing and new use cases in fact these updates already helped us secure contracts mentioned previously.
With an improved partner centric sales strategy enhanced biometric solutions and robust pipeline. We're confident we can expand our global footprint and capitalize on the growing biometric industry as a whole.
Now I'll turn the call over to Dave to walk us through our financial results for the second quarter before discussing our initiatives and outlook for the remainder of 2023 and beyond Dave over to you.
Thank you Bob.
Good afternoon to everyone on the call.
Turning to our financial results for the second quarter ended June 32023.
Total revenue was $3 $2 million compared to $4 $3 million for the first quarter of 2023 and $4 $2 million for the same year ago period.
Sequential and year over year decrease in total revenue was primarily due to lower software license revenue in the period.
For Q2 of 2023 recurring revenue was $2 $1 million or 65% of total revenue the $2 $1 million in recurring revenue was down 32% sequentially due to contract renewal timing.
Looking at our operating expenses, our second quarter of 2023 operating expenses were $6 $1 million.
Slightly down from $6 $2 million in the prior quarter and up from $5 $6 million in Q2.
Of last year.
Operating loss for the second quarter of 2023 with $2.9 million compared to $1 $9 million in the prior quarter and $1.4 million in the same year ago period.
For the second quarter of 2023, GAAP net loss totaled $2 $7 million or 13 cents per diluted share compared to a GAAP net loss of $1 $6 million or seven cents per diluted share in Q1 of 2023, and $1 $3 million or six cents per diluted share in the same.
The year ago period.
Our adjusted EBITDA loss for the quarter, which we reconciled to GAAP net loss in our earnings release.
<unk> totaled $2 $4 million, which compares to adjusted EBITDA loss of $1.4 million in the prior quarter and a loss of.
$8 million in the same year ago period.
Looking at our balance sheet, we ended the quarter with $25 $1 million in cash cash equivalents and marketable securities compared to $27 $3 million at the end of the prior quarter.
While our cash position remained strong we continued to optimize our cost structure to align with their business needs.
Furthermore, our robust cash position allows us the flexibility to evaluate all high ROI opportunities that have the potential to drive scale and <unk>.
Further our where's growth roadmap.
This completes my financial summary, now I'd like to turn the call over to Craig to discuss the progress we're making on our go to market strategy.
Right.
Thanks, Dave.
To be here with you all today.
As Bob mentioned in the second quarter, we continued securing and expanding the base, allowing our customer success team to secure several significant contracts. We are seeing increasing interest for aware as biometric solutions across all our verticals, which is reinforced by the sequential improvements in the fidelity of our sales pipeline.
In order to capitalize on the high quality opportunities flowing through the pipeline. We are focused on our optimized go to market strategy, which really comes down to three buckets or themes.
The first is building out our customer success framework, leading up to the second quarter, we laid the groundwork for this program by hiring the right people and shifting resources towards more customer facing revenue streams. This quarter. We continued building out these efforts to protect the base by submitting our customer relationships through contract expansions and renewals.
Our customer success team has done a fantastic job maintaining customer relationships and upselling contracts. In fact, this quarter one of our larger OEM partners increased their purchases by over 200% and two banks in Latin America meaningfully increased both their usage and services because of our team.
<unk> endeavors.
The second initiative is to solidify our customers and partners to counteract deals being pushed out due to the macroeconomic environment as well as introduce usage based pricing.
Pressures from the macro environment are still forcing customers and partners to delay signing however, we are being as beginning to see these pressures ease with some deals getting close to closing one contract in particular is a large government customer that our team has been working to secure over the past few quarters.
But we finally anticipate closing this deal in Q3, it's important to note that contracts are not disappearing just sliding into later quarters.
The more recent evolution of our go to market strategy was the introduction of usage based pricing, which the industry has been trending towards usage based pricing not only allows our team to accelerate the sales process, but we will also be a big push for our software services and subscription based revenues. This.
Reevaluated sales strategy enabled us to close the contract and move to Onboarding faster with a very significant airport security player in Spain, who will positively impact our subsidiary subscription based revenue in the coming quarters.
By implementing this pricing tier we can now catered to the customers' needs, allowing us to sign on partners and customers of all sizes and all types of macro environments.
Lastly, almost half of our pipeline is partner driven therefore, we have prioritized investments in our partnership program coming in 2023, we made conscious efforts to widen our partner footprint, especially in Latin America, as well as to procure partners that could drive organic growth and increase our market share.
In Q2, we signed four additional partners in Latin America, who will help expand our wallet share in the region through both organic opportunities as well as displacing competitors, which wasn't the case with one of these new contracts, we are proactively seeking potential partners in the biometric space with active.
To lay the groundwork for future business.
Moving forward, we're aiming to launch a formal partnership program in the latter half of Q3. This new program will be equipped with Onboarding tears partnership incentives and additional marketing to help fuel partner engagement.
Another key development Bob touched on earlier was the product improvements for aware Ids facial recognition and nomi liveliness excellence through the market's feedback we identified an adapted the functionality of these two solutions, allowing our sales and partner teams to go to market with more robust and secure technologies all.
Already these enhanced capabilities are generating significant momentum for nuomi and renewing the market's enthusiasm for aware I D, especially in document verification.
Customer success team is doing a tremendous job upselling, the new functionalities and recently renewed a customer for another five years.
Now I would like to turn the call back to Bob for additional insights into our key business drivers Bob.
Thanks, Greg.
Backed by an enhanced product portfolio and optimize sales strategy. This quarter, we secured and protected our base by reinvigorating the market's excitement for aware.
We're exiting the first half of 2023 with significant contracts and partnerships that we expect to greatly contribute to recurring revenue and lay the foundation for additional prospects.
With a healthy pipeline of quality opportunities and an optimized enterprise sales strategy. We are reiterating our expectation to increase total revenue and annual recurring revenue or <unk> by 15% in 2023.
We also continue to expect operating cash flow exiting 2023 to be neutral.
Which means we'll be managing both inflows and outflows stores profitability, while taking into consideration cash interest and timing expectations.
Looking into the second half of the year, we are excited about our upcoming expanding partnerships and deliveries and believe we are well positioned to achieve our cash flow goals and remain confident in our ability to grow sustainably and deliver robust recurring revenue going forward.
We appreciate everyone's continued support and are excited for where its future with that we're ready to open the call to questions. Matt. Please provide the appropriate instructions.
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.
Our first question Bobby.
Bob You mentioned that one of the main focuses this quarter was to protect and expand our recurring customer base can you provide some additional details on contract win secured this quarter.
Sure Matt.
Since we announced our business transformation and focus on a recurring revenue model.
We continue to make considerable progress and we've expanded our recurring customer base in fact, our recurring revenue as a percentage of total revenue in Q2 was 65%, which is a 16% interest increase compared to the prior year period.
This quarter, we signed expansion and renewal contracts and agreements with some of our largest customers as well as secured our next generation customers.
When I mentioned in my previous prepared remarks, we renewed and expanded our largest customer and nomi, which is E tail for another three years. We also signed our biggest ENB partner and they are banking customers as well.
And then we signed two new <unk> contracts, one of them being our first ever SaaS cloud Avis contract, which we talked about.
Another key customer we secured.
This last quarter was a five year $5 million of a contract with our largest <unk> customer.
And this will be recognized over the next.
A five year period.
This contract improves our annual recurring revenue, but also expands the capabilities of the customer system.
And it introduces facial recognition in addition to fingerprint capability.
This contract represents a significant win for aware and reaffirms the confidence our customers have in our technology.
And we're just continuing to build our foundation for future recurring revenue grow with each new contract signed and we're excited about the second half of 2023 and believe we have several promising opportunities in our pipeline.
Thanks, Bob what was recurring revenue for the quarter and how much recurring subscription revenue and how much was recurring maintenance revenue.
Yeah, I'll take that Matt.
So our recurring revenue in Q2 was $2 $1 million.
That's broken out to about $1 6 million of maintenance and the balance was our consumption or subscription based revenue.
Thanks, Dave.
Rob you talked about the Fidelities of pipeline improving can you talk about what this means and what not where it needs to do to convert its pipeline.
Yes, so we've taken up.
Taking a step back and looking at the pipeline on a trailing 12.
We've seen a big improvement in the quality of the opportunities.
So we took a significant motion to implement rigorous opportunity qualification for the new opportunities.
We're seeing more.
Through our established and growing customer base. So we're actually seeing through our customers that we've already signed up as partners their base and increasing and improving so we have a better grasp on their needs and business challenges.
So that we can solve that through our different products and then just mentioned through Craig's efforts, we're seeing a more expansive deals being negotiated as well as increased opportunities to secure new partnerships that will significantly expand our wallet share of the market.
<unk> already mentioned this in his remarks, but his team is laser focused on building out a formal partnership ecosystem and that's going to help generate new business and broaden the whereas reach globally.
Thanks, Bob next question, how our operating expenses trending this year.
Yes.
Our operating expenses have increased sequentially this quarter I mentioned that earlier.
And that's mainly due to investments in our sales team.
We on boarded.
Our new team of <unk> and <unk> in Q1, so those costs have increased but we don't anticipate adding any significant opex in the second half of 2023.
We're expecting our opex.
Opex will be flat to down ish in the third and fourth quarter.
We're of course working towards cash flow neutrality.
Thanks, Dave next question is for Craig.
Have been the driving forces behind the sales team's success in the recent bookings.
Sure.
I think our success is really a culmination of the groundwork that we have we've laid down over the last over the last several quarters.
Few quarters.
Introduction of our usage based pricing coupled with the product enhancements that we made to knowing aware I D. All of these things have.
Has it really helped to drive the bookings.
As well as since I started working at aware, we've worked to really perfect and we've talked a lot about this our customer success team.
And our partnership program. We now believe we have the right people processes and.
Best in class products to position ourselves in CFT was for success.
I know we've talked a lot on the improvements we've made no mean aware I'd. So I won't rehash those details, but the common combination of more robust products and the debut of usage based pricing enabled our sales team to market to more customers than we ever have before and resulting in some cases larger higher quality deals that we signed in Q2.
Thanks, Craig. Our next question is how is the competitive environment.
Greg do you want to take this one.
Yeah sure. Thanks, Bob.
That environment.
Is frothy.
In a word and we are continuing to aggressively pursue deals everything is competitive right now.
This market.
Despite pressures on functionality, we are winning lucrative contract displacing competitors around the globe through our improved fraud prevention capabilities and our strong Footholds, North America, Latin America, and the Middle East.
Regarding marketing opportunities or market opportunities you are seeing the improvements that know me know where it is gaining a lot of traction with commercial customers in Latin America, and the middle East in particular, Brazil, and Turkey, specifically not only did we signed four new partners in Latin America. We also extended enough sold several deals like the one.
With E town in Brazil that Bob mentioned earlier with.
With the addition of.
Contract management use cases, and strengthen fraud prevention capabilities, we really believe.
There are significant growth opportunities overseas and in these new verticals.
Our next question can you provide an update on the share repurchase program.
Yeah, I've got that math.
George.
Previous announced plan is.
It is in place.
As a recap in March of 2022, we announced a share repurchase program that would allow us to buy up to $10 million of our common stock.
That's active through the end of 2023 and as of June 30, we repurchased about $1 $7 million worth of shares.
Thanks, Dave We've got a two part question first can you talk more in depth about the improvements that were made to aware I'd nomi.
Second question is since deploying the product enhancements mentioned earlier are you seeing increased traction for Nuomi, Ana where I D.
Alright, Matt I'll take the first the first part and then I'll, let Brian talk about the market's response so.
So just in general today's security challenges are consistently and constantly evolving and after we did a lot of voice of the customer speaking one of the big customers. We continued to evolve we've aligned our product market fit.
We identified a few areas that Gnome is.
I'd solutions could benefit from making them more secure reducing additional cross customer friction and expand their use cases with focus on some new use cases.
So normally we concentrated on improving its lightness excellence to make it more robust while we've revamped the where are these infrastructure.
The strength of its facial recognition and document authentication from the bottom up.
And now that we've enhanced product capabilities, and we're seeing improved market fit for both the where I'd and Nuomi and I'll, let Greg talk a little bit more about what are you seeing as well.
Sure. Thanks, Bob.
With a stronger and more capable products our sales team is going to market with these products and specifically what we're doing in SaaS, both with aware IV and Avis is really opening up new markets for us.
We've incorporated a lot of this feedback into our products specifically around document authorization in some places.
And layered this all into our biometric portfolio and the efforts are really beginning to pay off Cross company. There is a renewed enthusiasm not just for Nuomi and aware I D. But also for aware the company, which we capitalized to expand into new verticals and geographies and increasing our market shares.
With direct customers and partners.
Yeah.
The next one is for Dave what are the company's capital allocation plans for the second half of 2023.
Thanks, Matt.
Capital allocation is about the same as it has been we finished Q2 with about 25, a little over $25 million in cash and marketable securities.
So this quarter, we continued to capitalize on the high interest rates in the market.
And so we increased our investments in highly liquid marketable securities as Youll see from our balance sheet.
For the remainder of 2023.
We plan to maintain a strong cash position with no debt and given us the freedom or optionality to evaluate any strategic opportunities that debt that could help us drive some meaningful scale and accelerate our growth.
Dave we have another one for you. It's a multi part question can you provide the current estimated go live date for the large scale Avis implementation that you referenced during both the Q4.
Q4, 2020 to call in the first quarter 2023 conference call.
Current quarterly revenue Q2 have any engineering services revenue associated with the <unk> implementation queue.
Q3, and Q4 have any significant engineering services revenue from this project.
We expect any significant recurring revenue from the Avis project.
Lastly, if so in what quarter do you expect it to hit the top line.
Yeah, Thanks, Matt that's a long one.
Well so to be clear what we're talking about here is the EBIT.
That was referenced in Q4 and Q1 is our first cloud Avis.
We talked about during the March call, and then announced it as Miami Valley in our press last week.
So we are still anticipating that contract to go live this summer as Craig mentioned last quarter.
And we're currently in the planning phase with the customer.
Yes, I think the thing to note is that unlike some of our historical program that included significant customization and engineering services.
Our aware abi's deployments, especially.
The cloud Avis include.
Includes some configured.
Figuration work to implement but they are not expected to require significant engineering services.
Mainly software deals.
So this this contract will have a positive impact on recurring revenue once deployed.
Yes.
The other thing to notice.
Our timing of awards and adoptions mean that aware has quite a bit of quarterly variation.
And financials and that's why I just wanted to.
Emphasize to our investors that we continue to focus on the full year outlook not so much the quarters.
Thanks, Dave we have another multi part question.
The PR announcement for.
See for walk up on.
On May 30 of 2023 since that was the last official announcement of closing on new business is it fair to say that no. Other business of that magnitude has closed since that date can.
Can you provide any comment on the number of downloads of the Esa for walk up.
Revenue associated my expectation is that the associated revenue with that specific application will be very small. However, if we close business of similar magnitude everyday may add up to a significant revenue eventually and finally are we closing small deals on a nearly daily frequency.
So I'll take the first part and then ill.
As Greg that's some more color but.
I've said and we've said before we arent able to issue press releases on all awards, nor would we plan to.
Often this is limited.
Well customer confidentiality agreements and we typically focus our work releases on deals that are slightly in a new area of initial adoption like safety work release demonstrates the use case in a customer facing shared services application.
Our choice to not issue a press release regarding an award should not be considered indicative of not winning awards or the only awards already received Greg do you want to add some more color on the awards and opportunities coming forward.
Absolutely.
Secured several bookings in Q2.
And since announcing our partnership with the civil work and our first cloud based it was award with Miami Valley that Dave just highlighted.
Miami Valley deal.
Five year deal that will have a huge impact on our recurring revenue as we continue transitioning to a SaaS based platform.
We can't we can formally announce every contracts on what we are continued constantly winning new contracts as the fidelity of the pipeline continues to improve.
So the opportunity type size and targets vary.
Very greatly based on the market and by region.
Is where I think.
Trying to pigeonhole it into one or the other.
Not our business right now we continue to build on a very strong enterprise Foundation globally.
<unk>.
We have also seen a surge in the <unk> pipeline and opportunities business. This mid market for Avis has really opened up with some vendors moving out or narrowing their focus so the ability for organizations to leverage cloud Davis for example opens up opportunities for our customer base that was out of our reach 12 months ago.
Finally, with <unk>, it's a new market and although deal size may be small at the beginning it does open the door for these customers to grow substantially as their business grows through our usage based pricing model placebo walk is a really good example of this type of customer, but we are also seeing similar engagements and internet banking.
Commerce education and gaming market.
Yeah.
Thanks, Craig. Our next question are there any other large deals on the horizon that can make a significant contribution to revenue and earnings. In addition to the Avis implementation you just mentioned.
If yes, what is the approximate probability.
It will have an impact in 2023.
So we have we have.
Several six figure deals we have won did you.
Seven figure deals that we are targeting right now for in forecasting for <unk> four.
Q3, and Q4 of 2023 all.
All of these opportunities.
Specific compelling events to get signed to implement this year.
We are very confident we will get them done and then it will have a positive impact on our revenue targets for 2023.
Great. Another question along that line your annual outlook implies some pretty drastic revenue growth for the rest of the year. What gives you confidence you will make it how much of the outlook for the next two quarters is covered by signed contracts.
Yes, that's a great question Matt.
So Bob and Craig have already talked a lot about the success. We've had with these recent bookings and then approved pipeline Craig just walk us through a bit of it but let me try to be a little bit more specific so our first half results were below our growth target is obviously and that's primarily due to the <unk>.
Timing of orders and delivery as we've highlighted here.
But our second half will benefit from a significant increase in recurring revenue, which was already booked.
It includes the large contract announced in our earnings release the expansion of renewals that we mentioned previously on this call as well as the cloud and its delivery underway that Gregg was just talking about.
So on on top of that.
So on top of these recurring revenues. We also are expecting a spike in licensing revenue across the second half Craig talked about.
Q six and seven figure deals.
And in a much better pipeline. So the combination of those two things gives us good good confidence in the second half of the year.
Thanks, David our next question what sort of growth can we expect in 2024.
Yeah ill take that Matt.
Unfortunately, the answer is that.
2020 for guidance at this point in time.
There's a lot left in 2023.
<unk>.
When when we're ready we'll come out with 2020 for guidance.
Thanks, David Our next question to what extent are you pitching new customers directly versus through resellers or partners.
Sure.
I'll take that one.
So.
Just over 50% I think I think Bob mentioned this 50% of our pipeline is through partners.
It is absolutely a key differentiator, we are winning partners away from our competitors that are helping us get into and solidifying markets. So we really look at our partners as a Z.
<unk>.
<unk>.
For us and <unk>.
Even when we are pitching through partners. We are very very involved in the process and again I talked a little bit about <unk>.
By markets and regions. We are we are a global company so having.
So having premier partners.
Tightly integrated with us all over the World gives us reach.
Much bigger than what we can do just going direct so right now it's just over 50% of our pipeline is through partners and a lot of our we are at right now is very direct versus some of our other products that are that are much more tied to a partner.
Okay.
Thanks, Greg at this time. This concludes our question and answer session. Your question wasn't answered. Please E mail <unk> IR team at AWS E at Gateway Dash <unk> Dot Com I would now like to turn the call back over to Bob for closing remarks.
Yes, I just wanted to thank everyone for joining us on the call today and I also want to thank our employees partners shareholders for their continued support and as a reminder, we may learn more about our strategy and the investor presentation deck. That's available on our website and we look forward to updating you on <unk> progress on our next call Matt.
Thanks, Bob I'd like to remind everyone that a recording of today's call will be available for replay via a link in the investors section of the company's web site.
You for joining us today for <unk> second quarter 2023 Conference call you may now disconnect.