Q2 2023 BIO-key International Inc Earnings Call

Speaker 1: No.

Speaker 2: Good morning everyone, thank you for standing by and welcome to BioKey International's second quarter 2023 conference call. During management's prepared remarks, all participants will be in listen-only mode. Afterwards, listeners will be invited to participate in the question and answer session. As a reminder, this conference is being recorded today Tuesday, August 15, 2020-23.

Speaker 2: Now I would like to turn the call over to Mr. Bill Jones, investor relations. Please proceed. Thank you everyone for joining today's call. Joining me today are BioKeys chairman and CEO , Mike DePasquale.

Speaker 3: and CFO , C.C. Welch. As a reminder, today's conference call and webcast, as well as answers to investor questions, include forward-looking statements, which are subject to certain risks and uncertainties that can cause actual results to differ from those currently expected.

Speaker 3: Words such as anticipate, believe, estimate, expect, plan, project, or similar words typically identify and express forward-looking statements. Such statements are made based on management's beliefs and assumptions as of today using information currently available pursuant to the safe harbor from liability provisions of the Private Securities Litigation Act.

Speaker 3: company, please see risk factors in the company's annual report as filed on Form 10K with the SEC. Listeners are cautioned not to place undue reliance on forward-looking statements which speak as of today's date only. BioKey undertakes no obligation to revise or to disclose revisions to any forward-looking statements to reflect circumstances or events that occur after today. And now let me pass the call to Mike to begin.

Speaker 4: Mike? Thanks, Bill. Good morning and thank everyone for taking time with us today. After my remarks, CC will review our financials and then we will open the call to your questions.

Speaker 4: Although our Q2 revenues were roughly flat compared to Q2-22, largely reflecting the timing of larger opportunities, our first-task performance reflects growing demand for our unique set of identity and access management solutions. Our first six months revenues rose 29%.

Speaker 4: Reflecting solid progress in the growth in our software license and services revenue, which carry higher margins.

Speaker 4: Importantly, we are building a growing base of annual recurring revenue in key verticals, including health care, government, and higher education, along with a robust pipeline of highly qualified large revenue opportunities that we expect to benefit our results in future periods. Our internal sales and marketing efforts have generated several significant IAM deployment prospects that we are working to advance to the contract stage.

Speaker 4: The scope and size of these projects typically involves longer sales cycles, so the timing is harder to predict.

Speaker 4: We believe bio-key's growing traction in the IAM space is a reflection of the strength of our flexible, scalable solutions and our leadership in identity bound biometrics. As suite of solutions offers a wide variety of multi-factor authentication options to uniquely address customer mandates.

Speaker 4: for passwordless and phoneless authentication, and are opening up larger opportunities for our company. I said last quarter that we've done particularly well in generating larger enterprise leads at recent Gartner hosted events.

Speaker 4: proving a number of quality sales engagements with target enterprise accounts.

Speaker 4: Building on this direct sales effort, we also attended Identifers in June and the NACO CIO Summit in July , and are planning to participate over the next few months in a number of security events along with our partners.

Speaker 4: We are confident that some of these larger scale opportunities should progress to formal deployments in the coming months, including a few that are already in proof of concept stages.

Speaker 4: Complimenting these efforts is our expanding base of global technical alliances and distribution partner relationships, which position bio-key to participate in a much broader base of opportunities on a global basis.

Speaker 4: Keep partners include in-tellysis, which operates on a global basis, and 3i, which is focused in the financial services and healthcare verticals.

Speaker 4: In Q2, we added savvy info tech in Ethiopia after the second most populous country and one of the fastest growing economies in the world. Saby provides Ethiopian banks and government institutions with digital and banking solutions, including end-to-end card personalization,

Speaker 4: Data protection, identity and access management, payment switching and fraud management services.

Speaker 4: We also forge the partnership with Pixel Infanito to bring our innovative IAM solutions to their customers across the endola.

Speaker 4: We are also now officially in the AWS ISV Accelerate Program. You'll hear more from us on that later this week or early next week.

Speaker 4: which is a very large and important ecosystem.

Speaker 4: This will provide access to all AWS financial services and healthcare selling teams.

Speaker 4: We are now working with the AWS Network in Europe , the Middle East, and in Africa, helping customers to move their IAM deployments to the cloud for greater availability, scalability, resiliency, and reduced overhead cost.

Speaker 4: Working with AWS plays a critical role, particularly in this region.

Speaker 4: Due to the AWS Partner Network, we can now effectively extend the scope of marketing our sophisticated cloud-based IAM solutions worldwide through all of their sellers.

Speaker 4: We also have a newer effort that is focused on building technical alliances with other leaders in the IAM industry.

Speaker 4: such as Beyond Trust, Fordrock, King Identity, and others.

Speaker 4: This strategy is designed to leverage our mutual strengths to enhance our ability to bring bio-key solutions to our mutual customers.

Speaker 4: Through these companies, although these companies are also at times competitors,

Speaker 4: We have found ways to work together to identify and pursue significant new sales opportunities, some of which would be hard for us to pursue on our own.

Speaker 4: As partners source sales opportunities are increasing, we are expanding engagement and awareness of integrated bio-key capabilities with our Channel Alliance partners.

Speaker 4: We initiated what we call Bio-Key University for online training in Bio-Key Solutions in the second quarter, and the next phase of the platform is targeted for October release.

Speaker 4: Our Q2 performance highlights included continuing traction with portal guard, IDAS, and supporting existing healthcare company clients in their migration to the browser-based Epic HyperDrive patient management solution.

Speaker 4: Our YouTube performance highlights included continuing traction with portal guard I-DAS in supporting existing healthcare company clients in their migration to the browser-based Epic HyperDrive patient management solution by November 2023.

Speaker 4: Recent deployments include the University of Iowa Hospitals and Clinics, Pauling Hospital, and Dayton Children's Hospital, both in Ohio. These existing bio-keyed biometric authentication customers are tapping the SAML capabilities of our Portal Guard IDES platform.

Speaker 4: to leverage their existing use of our identity bound biometric solutions to provide strong authentication of healthcare personnel that are accessing shared workstation environments.

Speaker 4: PortoGuard benefits our customers by letting them extend the value of our biometric solutions while also avoiding user re-enrollment or the adoption of more cumbersome, expensive, or shared multi-factor authentication solutions. PortoGuard's industry standard identity provider or IDP capabilities fully support HyperDrives modern authentication approach.

Speaker 4: Importantly, BioKey's unique identity bound by metric capabilities provide a personalized authentication solution that is both highly secure as well as frictionless for end users.

Speaker 4: Share workstations which are common in healthcare, customer service centers, even in manufacturing and industrial centers provide security and access risks due to password, token or card sharing.

Speaker 4: Bio-Key's IBB solutions address these vulnerabilities, supporting strong authentication capabilities in a cost-effective manner, balancing strong security, speed,

Speaker 4: and convenience. Turning the product, we recently completed the development of Portal Guard, PG Desktop, Multi-Factor Authentication for both Windows and Mac environments.

Speaker 4: We are currently redesigning our authentication engine and introducing certificate-based authentication.

Speaker 4: to deliver an improved experience.

Speaker 4: also expected to be completed and released later this year.

Speaker 4: We also expanded Portal Guard support for managed service providers and introduced and enhanced I-DES platform with infrastructure improvements and Linux support.

Speaker 4: These are all part of continued efforts to build upon the value and functionality of our solutions.

Speaker 4: New sales tactics are being deployed to enhance the quality and size of our engagements. We are starting to see progress in building our sales pipeline and improvements in sales forecasting all benefiting from his guidance. Our goal is to grow our sales opportunity pipeline by 3X or three times in the second half of 2023. We recently onboarded a New Sales Engineering Resource who comes to BioKey with many years of experience, most recently from OCTOP. He brings a new level of refinement and structure to our sales engineering capabilities.

Speaker 4: We remain confident that Bio-Key is positioned to deliver significant top line and bottom line improvements in fiscal 2023. With those comments, I'll now turn the call over to our CFO , CC Welch. Thank you, Mike. First off, we expect to file our 10-Q this week and to remain fully up to date in our SEC filing. Turning to the recent quarter, our Q2 revenues nearly matched those of Q222 and growth in high margin service and software license revenue more than all said to decline in hardware revenues.

Speaker 2: Growth in the service revenue was driven by customer deployment, migrations and expansions, including civil secure customers in the Amia region, as well as higher deployment in the US higher education sector.

Speaker 2: In the first six months of 2023, IOT's revenues rose by 29 percent, the 5 million compared to 3.9 million, also reflecting growth in service and license revenue partially offset by decline in the hardware revenue.

Speaker 2: Gross profits grew 8% to $1.3 million in Q2-23 versus Q2-22, principally reflecting a gross margin increase of 69% versus 63% in Q2.

Speaker 2: First margin benefited from a larger percentage of higher margin services than software revenue, as well as a decrease in third-party software cost due to regional software revenue, more than offsetting a year of the year decrease in hardware revenue.

Speaker 2: For the first six months, we'll profit from 27% to 3.6 million, again related to the growth in service and license fee revenue partially offset by lower hardware revenue.

Speaker 2: Operating expenses decreased 10% to $2.5 million in Q2 2023 versus Q2 2022 due to an ongoing overhead reduction initiative resulting in lower research and development expenses as well as lower selling, general and administrative expenses. We are pursuing a number of overhead expense reduction initiatives aimed at improving our bottom line performance.

Speaker 4: A&A costs reflect lower marketing personnel costs, offset by increased professional service fees related to regulatory filing delays.

Speaker 2: Given higher gross profit and lower operating costs, BioKey was successful in trimming the net loss to $1.4 million or $0.16 per share in Q2-23 compared to $1.7 million or $0.21 per share in Q2-22. Likewise the first six months of 2023 reduced our net loss to $1.7 million or $0.19 per share from $2.7 million.

Speaker 2: with current assets of 8.5 million, including 600 of cash and 3.2 million of accounts receivable and 4.4 million of inventory. Our receivables are typically collected on normal terms of 30 to 90 days. In terms of inventory, some of the excess inventory that we have purchased to avoid supply chain concerns and in anticipation of ramping requirements related to the civil ID projects in Africa is slowly being sold and liquidated to further strengthen our financial position. That concludes our prepared remarks.

Speaker 2: And now we will turn the call to the operator to begin Q&A. Thank you. I'll send the questions after the session. To ask a question, you may ask a star, then one on your telephone keypad.

Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker 2: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Speaker 2: At this time, we will pause momentarily to assemble our roster. Our first question comes from Jack Van Der Roerd with Maxon Group. Please go ahead. Phil Good Golem

Speaker 3: Okay, good morning, guys. Thanks for taking my questions.

Speaker 4: So, Michael, you mentioned some great stats with the pipeline in your prepared remarks, and I think I just missed some of that. I think you had some quantifiable pipeline remarks. Can you just remind me of what you said? Yeah, I said that our goal and objective is to increase our pipeline size by a factor of 3x in the second half of 2023. So, you know, our goal and objective is to increase our pipeline size by a factor of 3x in the second half of 2023.

Speaker 4: Most of that is happening as a result of two factors. Number one, our partner program is exploding. And we through, again, as I mentioned, AWS and other more strategic players are going to increase our deal flow. And in particular, our partners source deal flow, right? That they bring to.

Speaker 4: that we've been very successful in...

Speaker 4: creating a number of larger opportunity pipeline inputs from the Gartner events that we attended. So these are much larger customers that have very large.

Speaker 4: populations of employees and customers that are interested in our IVB and our general portal guard IDAP solutions. So that's how we're going to grow our pipeline. That is how our pipeline is going to expand and that's going to continue to grow as we evolve through the second half and into 2024.

Speaker 4: That is clearly, it's been our goal and objective for the last year to year and a half to really pushing the majority of our business to get it sourced and then to push for fulfillment through our partner network. And that's really starting to expand. Okay, great, great. And then let me ask a question on the quarter itself, the second quarter itself. I am still, I guess I'm struggling to still understand why your recurring revenue is flat year by year relatively, if you're seeing such increased demand and you're adding a ton of customers.

Speaker 4: Are you giving pricing discounts? Is there just the lumpiness in the business? I know one of the you know, like an arrow or you had one customer account or contract I think it was like point three million maybe maybe slipped But just you know, help me understand that when can we see more of a meaningful ramp in more of a smooth

Speaker 4: growth ramp going forward? Yeah, well, first of all, again, the bulk of our business is recurring revenue. So you know, we still do have some legacy customers that buy license from us, but the bulk of our business is really evolved to, you know, recurring revenue. And that's a combination of, on the legacy side, customers that are paying maintenance, right, but it's contracted.

Speaker 4: that's what we're doing, that's what we sell. In the context of this quarter, our business was flat year over year. That one customer, that defense ministry customer, which was about a $350,000 order,

Speaker 4: They wanted to negotiate a longer term arrangement, a multi-year arrangement, so it took a few extra weeks to do that. But if that had fallen on the June side of the quarter, we would have grew about 15 or so percent and on a year over year basis we would have been...

Speaker 4: somewhere around 35 or so percent instead of the 29 percent that we're at right now. Clearly our business is growing and it's ramping. You're going to see it again happen because of two things. Our commercial business are small and medium-sized opportunities, source-through partners and fulfilled-through partners is going to grow. And then...

Speaker 4: the larger, more strategic opportunities, as I described, which are harder to predict in the context of timing, they will have a big impact on our business. So for example, when you're working a large opportunity that could be anywhere from 500,000 to a million dollars or more in ARR, right, that's recurring subscription.

Speaker 4: and close down on some of those larger strategic deals to begin to see more, I'll call it more significant growth and more consistent growth.

Speaker 5: Okay, great, great. And then, you know, just to that point, let me ask one more thing, and then I'll switch gears. But so I guess what I want to understand is what you mean by significant top line growth. So I think investors want to know, what do you talk about your outlook? What do you mean by significant top line and bottom line improvement?

Speaker 5: So if I look at year to date, year to date, Michael, your revenue is up 29%. So the first six months of the year, it looks like. So if 29% of your day, is that what you consider significant? Just help us understand, just to get a sense of what the back after the year could look like based on your kind of informal guidance commentary.

Speaker 4: Well, you know again, we're not providing guidance and I could have provided guidance at the beginning of the year and said look We're gonna do you know X over we did about seven million last year, you know, what is the number going to be? I've been very cautious about that because We're trying to be A first of all, it's very difficult for us to be ultra predictable

Speaker 4: It's very, very difficult because of the timing. The larger deals with larger companies tend to take on a life of their own. Sometimes they slip, sometimes they just require six or nine months of...

Speaker 4: selling cycle. So it's very difficult to predict. So I've been very cautious about that. I did not want to paint the number that the company will not be able to achieve. But I will say this, we have grown annually each of the last two years.

Speaker 4: into this year and we're gonna grow, you know, we're gonna grow significantly this year again. And I hope and, you know, we believe it's gonna be well north of where we are today. The third quarter, as you know, is generally our slowest quarter because of our business in Europe , which as you know, Europe is.

Speaker 4: fundamentally closed in July and August . But we believe this quarter will be a very solid quarter and we will have by the end of the year, by the fourth quarter, that partner engine really humming and some of these strategic deals landed. And so,

Speaker 4: You know, significant is significant, significant. Let's put it this way. More than we've grown the last two years.

Speaker 5: Okay, great. That's helpful. That's helpful. I appreciate the added color there. And just just your your comments on third quarter seasonally slower because of the European business and the nature of that. That makes sense. But would it do you expect the third quarter to be up year over year since it's against another seasonally slow period last year in the third quarter?

Speaker 4: Yeah, we do and you know, keep in mind we had that $350,000 order slip into Q3. So we kind of came over the transom with an advantage. So yeah, I think it's safe to say we believe that. Yes. Okay, great. And then just one more question per usual. My favorite question is, it's such a material opportunity.

Speaker 5: Can you just give us an update again on the two original large after contracts? And if and when we could see any sign of meaningful revenue recognition from those? Thanks. Great. Good question. You know, as you know, we came into the year and we totally discounted.

Speaker 4: any business or revenue from Africa from those contracts. We did that because the delays have just been incredible, right? We've been dragging these for two, you know, two and a half years. They are still alive, and the business is clearly still alive. There's, in particular in Nigeria, there's a new president.

Speaker 4: that's taken over and there's a renewed focus, including from the World Bank, now that they've developed a new data privacy commission and they're starting to put a lot of thought into the identity ecosystem to bring people out of poverty, not just in Nigeria but across Africa. So,

Speaker 4: to stay on top of things, but once the money flows, we'll be there and we'll be able to take advantage of the investment that we've made over the last couple of years. But it remains a very, very difficult environment. And I think, although we're optimistic that that may change, it's not factored into our numbers this year.

Speaker 5: Okay, that's helpful. And then if I may just try to probe again, not factoring your numbers this year, it's very difficult to get visibility into it. I understand. Is there, based on where you see things today, is there line of sight, though, or an opportunity for these to start moving forward in 2024?

Speaker 4: Actually, there is and hopefully before the end of 2023. But you know, we have an initiative underway in the payment space that is commercial. So it's not directly related in any way to the government which

Speaker 4: Which again, is an opportunity to create revenue flow and margin and profit for us in a commercial business there. It is the largest emerging market in the world and everybody wants to be there. But it takes...

Speaker 4: It takes a lot of staying power and it takes a lot of time, energy to generate meaningful revenue. But I do believe that it can happen before the end of the year and certainly into 2024.

Speaker 4: Okay, great. And one of the comments I just want to make, I think in my prepared remarks, I talked about a couple of partners that we had brought on board. So we also are very focused, and not just again in Nigeria, but in Angola and Ethiopia, working with partners who have the cultural business experience and who have the connections withoo this pandemic. I will hear you again in the best coming business.

Speaker 4: in the industries that have money and can spend money, not just again the government, that's also our target and our goal. And we signed three or so really, really good partners just in the last quarter who are going to help take biokey solutions into that market. So that's another way for us to leverage ourselves in Africa.

Speaker 4: Okay, I appreciate the added color. That's it for me. Thanks, Michael. You're welcome. At this time, showing no further questions, the Q&A session has ended. I'll now ask Mike DiPasquale for any closing remarks. Thank you, everyone, for joining us today. We look forward to updating you on future updates and calls.

Speaker 4: And we expect to attend two conferences this fall in New York. Specifically, we expect to participate at the HC Wainwright conference in September and the MACSUB conference in October .

Speaker 4: Please reach out to your representative there or our IR team whose contact information is in today's press release for details.

Speaker 4: We'll update you again on our Q3 call in November and, as always, we'll provide interim news updates via press release. Again, thank you for your time this morning and have a great day.