Q4 2023 BIO-key International Inc Earnings Call
Good morning, everyone.
Thank you for standing by and welcome.
<unk>.
National's fourth quarter 2023 conference call.
During managements prepared remarks, all participants will be in listen only mode.
Afterwards, well shows will be invited to participate in a question and answer session.
As a reminder, this conference is being recorded today Tuesday April 2024.
Now I would like to turn the call over to Bill Jones with Investor Relations. Please proceed sir.
William Jones: Thank you.
Thanks to all for joining today's call are hosted in our bio keeps chairman and CEO might be Pasquale.
And C S L P C Welsh.
William Jones: As a reminder, today's conference call and webcast as well as answers to investors for questions.
William Jones: Include forward looking statements, which are subject to certain risks and uncertainties that can cause actual realized results differ from those currently expected.
William Jones: Words, such as anticipate believe estimate expect plan project or similar words.
William Jones: Typically express and identify forward looking statements. These statements are made based on management's beliefs and assumptions as of today and using information currently available pursuant to the safe Harbor provision.
William Jones: The Securities Litigation Reform Act of 1995 for a complete description of these and other risks that may affect the future performance of the company. Please.
William Jones: Please see risk factors in the company's annual and.
William Jones: Other reports filed on Form 10-K with the SEC.
William Jones: Listeners are cautioned not to place undue reliance on such forward looking statements, which speak as of today only.
William Jones: <unk> undertakes no obligation to revise or disclosed revision to these forward looking statements to reflect circumstances.
William Jones: Or events that occur after today.
William Jones: And now let me pass the conference to Mike.
William Jones: Right.
Mike: Thank you Bill and good morning, and thank you all for taking the time to be with US today. After my remarks Cc will drive provide a brief overview of our performance and we will then open the call to your questions.
Mike: At the outset I did want to mention that because the audit of our 2023 financial statements that's not yet been completed by our independent.
Mike: Accounting firm, we were not able to report our full financial results in today's release and instead, we provided an overview of our preliminary results, which are subject to change.
Mike: We have filed a form N T 10-K, with the SEC, which provides us an additional 15 day period in which to complete and file our audited 2023 results.
Mike: Now turning to 2023.
Mike: Want to thank the entire global biotech team and our partners for their dedication and hard work that enabled us to achieve substantial topline and bottomline progress in 2023.
Mike: I hope he grew revenue by approximately 29% to $9 1 million and we were able to trim, our adjusted operating loss, adding back inventory reserve by nearly two thirds to $3 $6 million substantially advancing the company to our goal of profitability.
Mike: Following the close of 2023, we completed a two year, one and a half million dollars prepaid license agreement with a long time financial services customer enhancing our balance sheet to fund 2024 growth initiatives.
Mike: Over the past year identity and access management continued to build in importance as more and more enterprises navigate security efficiency and cost challenges related to their transition to the cloud.
This ongoing migration and the increasingly hybrid work environment provide a range of growth opportunities for bio key both with new customers and through the transition of on premise customers to the unique benefits of our I D software as a service solutions.
Mike: More and more enterprises are experiencing a greater number and a variety of security incidents, reflecting new attack mechanisms, reducing the efficacy of their cyber security defenses.
Mike: Adding to the challenge are persisting shortages of cyber security personnel to prevent and respond to cyber cyber attacks and threats.
Mike: Further supporting the adoption of enhanced identity and access management solutions are a growing array of regulations standards and even insurance underwriting requirements as.
Mike: As we've mentioned multifactor authentication and password list security already front and center for any business that wants or needs to receive cyber insurance coverage.
Mike: And the FCC's, new cyber risk management and reporting rules went into effect at the end of 2023.
Mike: Finally, the cyber security and infrastructure Security agency will formally publish its proposed rules for cyber incident reporting this week with a 60 day public comment period.
The CCR rules would require covered entities to promptly report cyber disruptions and ransomware payments.
Mike: And as just another framework that will put cyber security top of mind for all enterprises no matter what size in 2024.
Mike: We believe these examples serve as a very favorable backdrop for the future sales of our key product solutions, including portal Guard I Das and web T, which.
Mike: By it organizations and integrated approach to managing edge security all of their digital identities with technologies, they already use while providing flexibility to support future needs.
Mike: Our platform allows users to watch that to keep their customers employees contractors and partners enables any user to connect to any device cloud or application all with a simple customizable intuitive and consumer friendly user experience.
Mike: We use service security identity bound biometrics to support roving users without requiring them to carry their phone or a token.
Mike: In response to the proven vulnerability of passwords 'twenty.
Mike: 2023 witness mainstream adoption of pass skis by Google, Apple, Amazon and Microsoft and others.
Due to the versatile security user friendly authentication experience that they provide.
Pastiche utilize a combination of cryptography and public key infrastructure towards dedicate users to web sites and applications without the need for passwords.
Mike: We believe the global use of Pascal keys, which eliminate the use and inherent risk of passwords will continue to expand at a rapid pace.
Mike: The position bio key in this large growth opportunity later this month, we plan to introduce Pesky U. The first pass key solution that utilizes biometric authentication instead of relying on phone or hardware based token methods.
Mike: This differentiation makes our solution, particularly compelling for a variety of enterprise use cases with planned enhancements to the solution coming out later this year.
Mike: Turning to our go to market strategy.
Mike: In the U S. Our direct sales team is focused on a pipeline of larger customer opportunities.
Mike: And while the sales cycle is typically much longer for these initiatives they provide much greater potential to drive meaningful revenue recognition and opportunity going forward.
Mike: Our other path to market is through the global Channel Alliance partner or cap program, which continues to build both in its geographic scope and its sales productivity.
Mike: We have built a base of over 150 partners, including resellers system integrators and other distribution partners.
Mike: We're committed to supporting the growth and success of our channel partner base in 2024 as it represents a very efficient and cost effective means to expand our global customer reach.
Mike: Our direct and channel sales strategy enabled by all key to achieve solid growth over the past few years, and we expect it to contribute to meaningful top and bottom line improvements in 2024.
Mike: The recurring nature of our SaaS and services model has provided a growing revenue base on which to add new deployments through new customer wins and the expanded penetration of existing accounts.
Mike: Annual recurring revenues represented more than 70% of <unk> total revenue in 2023 with a blended gross margin of approximately 65%.
Mike: I've touched on many of the reasons for a very positive market outlook for 2024.
Mike: But what is critical is the very attractive value proposition that our products provide plus the fact that enterprise security needs are not currently being met by mainstream authentication methods.
Mike: We are an industry leader in offering 17 authentication methods.
And within our I E M solutions to meet an ever evolving customer demand and use cases however.
Mike: However, it is our deep biometric experience and intellectual property and the strategic use of biometric technology provides that greatest differentiation for us and for our I E M solutions and our iam customers.
Mike: We currently have more than 6600 customers across multiple industries using bio key to secure and manage access for approximately 40 million users around the world and we have partnered with some of the larger iam industry players like Sailpoint Ping and for drop to expand our reach.
Mike: Enterprise accounts with deployed I E M solutions that can upgrade their multi factor authentication to include to include ours.
Mike: And as our brand becomes better known.
Mike: Our increasingly we're increasingly finding that enterprises, who have significant risk.
Mike: Our attorney to our channel partners and to our direct sales organization to upgrade their existing MFA two hours, but.
Mike: These and other reasons, we were excited and optimistic about <unk> potential to deliver continued growth and bottom line improvements in 2024 and beyond.
CFO: With that I'll turn the call over to see see Welch our CFO.
CFO: Yeah.
Welch: Thank you Mike.
Welch: As Mike referenced.
Welch: The audit of our 2023 financial statement has not yet been completed by our independent registered public accounting firm and therefore, our numbers provided in our release.
Welch: <unk> today are preliminary and therefore subject to change.
Welch: 2023 revenues increased 29% to nine 1 million from $7 million in 2022, driven by increases in <unk>.
Welch: Oh licensee hardware sales and service revenue.
Welch: Service revenues benefited from customer services for new installations, and so it will secure service fees and conversions from on premise deployment of Cologuard two.
Welch: Oh, God I'd ask cloud platform.
Welch: Revenue benefited from the fourth quarter sales to foreign Defense agency in 2023.
Welch: <unk> Q4, 'twenty three revenue grew 26% over Q4 'twenty two also driven by the aforementioned hardware sales to the foreign Defense agency.
Welch: In Q4 of 2023.
Welch: We took a $2 8 million noncash reserve and slow moving inventory purchased for large projects in Nigeria in Q4 of 2023.
Welch: The reserve expense, which was included in the cost of hardware caused a decline in the gross profit to three 3 million in 2023 from $4 6 million in 2022.
Excluding the noncash charge, our gross profit would have increased 34% to $6 1 million in 2023.
Welch: Also excluding the reserve our gross margin would have increased to 67, 6% in 2023 from 65 to <unk>.
Welch: In 2022.
Welch: We continue to pursue opportunities to monetize its hardware in Africa and other stuff.
Welch: To further support our growth monopolies.
Welch: Turning to operating expenses, our SG&A decreased 22% to $7 3 million in 2023, reflecting lower sales and marketing expenses, including personnel and related benefits and outside services expenses.
Welch: Our channel centric sales strategy as well so long as to grow with minimum payment of only related commission or discounts to total revenue.
Welch: Further as many of our team can now work remotely we have downsized, our corporate headquarter footprint in New Jersey in 2023.
Welch: And I'll at least expense and related occupancy costs.
Welch: Cost cutting initiatives slightly offset by higher professional fees related to regulatory filing and costs related to debt repayment and reverse split.
Welch: Research and development included.
Welch: Engineering expenses.
Welch: I have declined by approximately 900000 or.
Welch: Our 26% due to reductions in personnel and related benefits and outside service expenses.
Welch: Our operating loss was trimmed about $3 5 million to $6 four.
Welch: $4 million in 2023 versus the operating loss of nine 9 million in 2022.
Welch: We continue to focus on cost saving initiatives in 2024 to support our path to cash flow breakeven and profitability in.
Welch: Terms of our bottom line.
Welch: Collecting revenue improvement and lower operating costs Iot significantly trimmed its not lost by 48%.
$2 million in 2023 from $12 2 million in 2022.
Likewise, the Q4, 'twenty Iot reduced its that lasts more than 40% to $40 1 million from $6 7 million in 2022.
Welch: 2023 periods being impacted by the $2 8 million.
Inventory was there.
Welch: As of year end buy up he has current assets of $5 3 million, including half million of cash and cash equivalents and $3 2 million of accounts receivable from foster and $1 2 million of inventory.
Welch: The $3 2 million reserves.
Subsequent to the year end.
Welch: As we have mentioned in this release bio team received $1 5 million in cash related to an expanded two year extension and expansion of a license agreement with long time financial services customer that utilizes our biometric technology for customer authentication.
None: That concludes our prepared remarks, and now I turn the call over to the operator for Q&A.
None: Thank you.
None: I will begin the question and answer session.
None: To ask a question you May press Star then one on your telephone keypad.
None: He was pretty good for only a single place for her hand, so preferred personally shoes.
The majority of your question. Please press Star then two.
Once again Thats Star then one if you have a question.
None: Okay.
None: And today's first question comes from them.
None: He is a private investor. Please go ahead.
None: Hello.
Them: Good morning, Dan Good morning.
Them: <unk>.
None: So the inventory.
None: Reserve.
Was increased from.
Dan: 500, K to 3.2 is that what I heard you say C C.
Dan: To your point it was 400 last year and 2022 and then this year another 2.8 million.
Dan: And.
Dan:
Dan: What what is it did you say $1 2 million was met out of the $3 2 million reserve I'm not sure what that means.
But yeah, we have other inventory that is not reserved it.
Dan: Fingerprint reader then and other.
Products that come in and out on a regular basis, both here and in Hong Kong.
Dan: I.
Dan: I guess I'm kind of wondering does this mean does this reserve mean that.
Dan: Uh huh.
None: Hey, guys. Thank you can only get say, one or 2 million for the.
None: For the hardware or is there a potential that you'll have to write the rest off I'm just kind of wondering what this means exactly.
Well I can I can answer the question on the reserve it's fully reserved she sees that correct.
None: The African yeah.
None: Okay got it so so it's fully reserved so in in the context of very specific to your question do we think that we're going to have to sell it at a reduced.
None: Price.
None: Not really sure but the bottom line is all of that.
None: Inventory when it's sold back components of inventory, we'll go right to the bottom line and.
None: You know, obviously will turn into cash immediately and so that's our focus right now and we have.
None: Two.
None: I'll call it larger projects that.
None: Look very promising for us to move a substantial.
None: Quantity of that inventory in the short term so.
None: I think from a.
None: Cash and a.
None: A bottom line perspective, it will be certainly positive for us in 2024.
None: Okay.
None:
None: Yeah.
None: That's.
None: Yeah.
None: The past skewed are you was there a lot of R&D on that or are you done with the R&D should we expect an increase in R&D on that.
None: I know, it's been something that we've had in the works for a while there's still a little bit of work to do around it but it's a it's a product that we've actually demonstrated before at a number of.
None: A number of industry events, and we'll be launching it shortly you know formally launching at G. H shortly.
None: What it does.
Banners and allows.
None: A R biometric to look exactly like a phyto token.
None: Without again, the token or phone.
None: So fundamentally you can put your finger down on any one of our fingers scanners utilize a biometric.
None: And have that act as a vital tokens, so think about a manufacturing floor wear.
None: Those employees can't carry problems around and you don't want them plugging tokens into the USB port.
None: A kiosk or a computer that may be on the on the shop floor.
None: For our service techs, perhaps in a and in autumn in an auto dealership.
None: For those that are.
None: In a call center, where you don't want them to have again, a phone and you don't want to provision tokens. So this solution.
None: Is a perfect perfect.
None: Enabler for a fido type.
None: Authentication without a device. So we think it's going to be very powerful and most enterprises large enterprises have.
None: Apartments are use cases, where they could take advantage of this and the beauty about it is it does not require a infrastructure.
None: It's very very simple and it can operate underneath.
None: Anyone's existing.
None: I am infrastructure. So we could for example, if a client is using our okta or a sailpoint or paying or for drop they can fundamentally take advantage of this solution.
None: Underneath that infrastructure and take advantage of our biometrics.
None: Huh.
None: Is this is this a software only solution then or is there still a hardware piece involved.
None: There could be hardware involved if they need to purchase finger scanners, if they don't have them.
Available.
Yes, that's definitely a hardware opportunity but.
None: It is it's a software solution.
None: I see so instead of the fight okay that the guy carries there's a reader that goes with the device or whatever they used to log in or something but it stays on the device. So it can be used by multiple individuals.
None: So for example, Keith as you know have to be deployed to each individual and they have and you have to deploy multiple keys in case, an individual loses one or misplaced it toward where it gets damaged.
None: In this case, you put one fingerprint scanner on the device and multiple users can take advantage of that and do a fido authentication without again, having their individual device or their phone to use as a token.
None: Where are your customers asking for this I'm wondering is there a differentiator that'll make customers move from.
None: The dongle or the hardware device to this.
None: Yeah.
None: Well I think there's there's a number of potential reasons for that number one the cost and the provisioning so even take the money aside.
None: These costs have to be provision you know you've got to send them to individuals', we're looking at hybrid workforces today.
That.
None: In fact, some fully remote and hybrid it best.
<unk>.
None: Work environments that create a real.
None: Difficult scenario to provision these devices so.
None: It's compelling to take advantage of a software and again, a kiosk based biometric solution for the use cases, I mentioned right in call centres manufacturing health care, where multiple individuals' access a single workstation.
So it's pretty compelling and yes, our customers are responding.
Nicely to two.
None: The use case potential and the opportunity and the cost savings associated with it.
None: Great.
None: Great.
None: You mentioned, 65% gross margins is that.
None: Is that where you think you'll be in 2024.
As you know that varies right. We can be we can be in the 60% to 75% range depending upon the.
None: The hardware component of that particular quarter, but but where in that range and I think on a blended basis. We were at 65%, we're certainly going to be there or above.
None: Okay.
None:
None: Of course, this time of year, we always hope for some type of guidance for 2024.
None: Do you have any feel for your recurring revenues or some idea that you can give us on what you feel your growth rate's going to be.
None: Well you know we've historically grown in the you know.
None: In the in the 20% to 30% range and.
None: I would expect it will be able to continue on that trajectory and that's historic so we're not.
None:
None: We're not stretching here, we'd like it to be more significant than that and depending upon the larger strategic opportunities that we have in our pipeline.
That.
None: It is certainly possible and may happen as I mentioned in my prepared remarks, we have a bifurcated approach.
None: And go to market strategy and that is to use our direct sales resources on the larger strategic opportunities that are a little bit longer term, but again are in the high six figure seven figure range and to utilize our channel and all of our channel partners.
None: Handel, our small medium enterprise business and to become much more efficient.
None: And being able to consummate.
None: A larger number of transactions and so we're getting better and better there are partners, who are coming up to speed and are getting more independent and being able to source and then ultimately deploy our solution. So I think as that.
None: Evolves.
None: We certainly will see growth.
None: On both sides of that bifurcated model so.
None: We're not going to go up and provide guidance numbers, but if you look at our historic growth. We believe we certainly can continue to grow as we have in the past and we're.
None: We're getting closer to <unk>.
None: Breakeven.
None: And to profitability and cash flow breakeven and cash flow positive and we hope that will be.
None: A milestone that we achieved in 2024.
None: Okay, and what about I mean last year, I think you announced $7 million you were very happy with that in terms of recurring revenues do you have any kind of feel for I mean is it 7 million again for recurring revenues this year or is it.
None: Up a bit or yeah, I mean, the bulk of our sales.
None: Our subscription based recurring revenues and so I think in our prepared remarks, we said about 70% of our 2023 revenue was was recurring or contracted and so.
None: That percentage is likely going to hold and maybe even grow.
None: The only.
None: Outside of our legacy customers, a handful of our larger legacy customers that still buy perpetual licenses virtually everything we sell is subscription based.
None: Okay and the last question I guess, so do you.
None: How much did you scale down your office in New Jersey, I mean, you do still have offices. There are you guys.
None: Yes, we do.
None: We had a we had a quite a large 67000 square foot office.
None: <unk>, which we had for great I think 10 years, we probably had two lease renewals on that office, we closed that down and we're now in the bellwether vasu.
None: Facility and home down in New Jersey, which is a shared office kind of complex and so we still have our headquarters in New Jersey, and we have a small office there and it's a flex office. So we can utilize.
None: Conference facilities are all kinds of different amenities, if we need them, but we don't have to pay for them unless we unless we need the men unless we're going to use them. So we've cut our expenses down significantly.
None: We are also we look at.
None: Whenever we have a lease renewal up obviously, we're looking at efficiencies and opportunities. We're looking right now at our Egan office in Minnesota, which houses our biometric technology resources and all of the equipment associated with that and we're looking at that as well there may be some cost savings for us as our lease expires later this year.
None: Or to.
None: You can get more efficient.
None: I see do you have a number and cost savings that you can give us a for closing down the office just curious.
None: My My guess is that a that's probably when you think about all the infrastructure you know fiber lines and rent.
None: Cleaning I would say, we're probably saving anywhere from 100 and.
None: 25 to $170000 a year if not more.
Okay Alright.
None: Alright, well I think I've asked a number of questions here, so I'll get back in the queue I appreciate it. Thank you.
Thank you.
Speaker Change: And our next question comes from Jack Vander Ark with Maxim Group. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Okay, great. Good morning, <unk>, Thanks for taking my questions.
Speaker Change: So Michael I'll, maybe just some more quick housekeeping questions as you kind of wait for the 10-K.
Speaker Change: I guess first one can we expect to see an income statement balance sheet.
Speaker Change: Complete financial statements is that is that something we have to wait for the 10-K oar.
Speaker Change: Is that something you can provide in our press release.
Michael: No we're going to we're going to wait for the 10-K, we just felt it made more sense the auditors are.
None: That just weren't at a point, where we we felt comfortable publishing those numbers. So we within the next two weeks. That's our expectation is that we'll file the K and we'll have the full financials available at that time.
None: Okay. Okay, and then in terms of on the front page of the 10-K, you kind of give us an updated <unk>.
None: <unk> share count.
None: How many shares are outstanding.
None: Maybe maybe cc has in front of us.
None: Yeah, It's a it's just about 1.9 million shares.
Maybe a little bit less OCC in that range.
None: Alright.
None: That's it it's a little bit less.
None: Okay Gotcha.
None: So at one point.
None: And then.
None: Okay. So that being said I guess in terms of the fourth quarter revenue by segment.
None: It is helpful for to try to dig into is just to understand the moving parts here, if I, if I kind of back into the fourth quarter.
None: License revenue for <unk> seems like it was just about just over 1 million maybe.
None: Kind of flat, maybe down slightly year over year.
None: In services revenue may be about 450, K down kind of year over year and sequentially I believe I guess does that sound about right <unk> license revenue just over $1 million.
Services revenue of about 450 K.
None:
Unfortunately, Jack I can't answer that question I don't know if cc has that data.
Jack: I have that data, but it's not open but I know it was a big quarter for our hardware.
None: Okay, and going back to I guess.
None: Yes, okay.
None: The only thing I can comment on Jack is that we had a a large a.
None: Like I said I can get back to you on the fence Ministry.
None: I had had to place a very large order for.
For our.
None: Both our software and the hardware to facilitate it so alright.
None: It was it was.
None: It was a big hardware quarter for us in Q4.
None: Okay understood.
Yeah, I think that's it for me if I have any more I'll follow up offline. Thank you. Thank.
None: Thank you thanks Jack.
None: And as a reminder, if you'd like to ask a question. Please press Star then one.
None: Next question comes from Sam I'm trying a private investor. Please go ahead.
Oh, Hi, Tim.
Sam: Good morning.
Sam: The first question that I have as the gross margin.
Sam: The gross margin fall off control, it's a lot higher and the mobile.
Sam: Portal are we planning on selling the marketing Department got in.
Sam:
Sam: In Europe.
None: I think yes, let me repeat the question just make sure I understand it. So I think you said that the gross margins on our bio key software.
None: Our higher than the gross margins on some of the software that we sell in Europe is that was that your question.
None: That is correct.
None: So the answer is yes, we sell both the swivel secure product in Europe, and the gross margin on that product is 50% obviously the gross margins on the products that we sell that are bio key related or higher.
And so the answer to that question is yes, we sell both end and our plan is obviously to grow both of those segments, but yes, certainly that's that's our mission and objective.
None: Okay.
None: And the thank you. The second question is the for the last couple of years. So we do see revenue increase and if you look at the breakdown by region.
None: The North America is pretty flat.
None: But we do have increase in our middle East and Africa is there a particular reason why the North America is pretty flat for the last couple of years.
None:
None: I would say some of the larger opportunities that we've closed like with the international Defense Ministry and a very large bank and <unk>.
None: In Africa have have certainly from a.
None: Just from a revenue perspective, those larger strategic deals have contributed more to the overall growth in our business.
None: Our transaction count seems to be higher in North America. The deals are smaller and that's what we're very very focused on right now some of the larger strategic opportunities that we have in our pipeline are north American based so there their household name companies and I think youre going to start to see.
None: To see that grow here in 2024, so so I think that will grow across the board.
None: In each of the key regions in 2024.
Thank you that's it for me Youre welcome.
None: And this concludes our question and answer session.
None: As all of us by a couple of them.
None: Calling for closing remarks.
None: Well. Thank you everyone for joining us today, we look forward to updating you on future quarterly investor calls, including our Q1 call on next month.
None: Please reach out to our IR team, whose contact information is in today's press release with any follow up questions and as always we'll provide news and updates in the interim via press releases again. Thank you for your time this morning and have a great day.
None: Thank you this concludes.
None: Today's conference call.
None: You also have some reservation.
None: There's a bunch of loans from other wonderful day.
None: Okay.
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