Aware Q4 2023 Earnings Call Transcript

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March 12, 2024

There are 4 speakers on the call.

Operator

Good afternoon, and welcome to Aware's 4th Quarter and Full Year 2023 Conference Call. Joining us today is the company's CEO and President, Robert Eckel Principal Financial Officer, David Traverse and CRO, Craig Herman. Following their remarks, we will open the call for Before we begin today's call, I'd like to remind everyone that the presentation today contains forward looking statements that are based on the current expectations of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward looking statements that management will be making today.

Operator

Aware wishes to caution you that there are factors that could cause actual results to differ materially from those indicated by such statements. These results and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10 ks and quarterly reports on Form 10 Q. Any forward looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, Aware undertakes no commitment to update or revise the forward looking statements whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

Operator

Additionally, this call references recurring revenue, annual recurring revenue and adjusted EBITDA, which are non GAAP financial measures as the term is defined by the SEC in Regulation G. Non GAAP financial measures should be considered in 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 measures in the company's earnings release issued today. I would like to remind everyone that this presentation will be recorded and made available for replay via a link available in the Investor Relations section of the company's website. Now, I'd like to turn the call over to our CEO and President, Bob Eckel.

Operator

Bob?

Speaker 1

Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we reported our results the Q4 and full year ended December 31, 2023. A copy of the press release is available in the Investor Relations section of our website. 2023 marked a record breaking year for Aware as we began to see the impact of our successful transformation to a recurring revenue and subscription first business Our financial performance reflects our continued efforts to drive sustainable growth by prioritizing annual recurring revenue, focusing our go to market strategy, enabling our partner ecosystem, accelerating product market fit and optimizing our organizational structure.

Speaker 1

Our strategic execution yielded markedly improved results, in line with our expectations for 2023. Headlining our success was a 23% growth in annual recurring revenue, or ARR, bringing our ARR to $12,000,000 an impressive level, especially when you consider where it was generating approximately $12,000,000 in total revenue in my 1st year of this transformational journey 2020. Our total revenue now after the 14 percent year over year growth to $18,200,000 marks the highest level since 2016. Furthermore, we have In Q4, we generated $3,700,000 in recurring revenue, reflecting a 40% year over year growth. These achievements propelled us to achieve the highest level of annual recurring revenue in the company's history and establish a strong recurring revenue base for 2024.

Speaker 1

Moreover, our focus on cost optimization and operational efficiency is not only strengthened our financial position, but it also positions us for sustainable growth. We do still continue to see long sales cycles and did have net income negatively impacted in the quarter by a $2,700,000 write off related to a March 2022 $2,500,000 investment in Omlist Limited. Overall, we did see a significant reduction in cash burn in the year underscoring our commitment to financial prudence and sustainable growth. Craig and his team have demonstrated their ability this year in securing valuable clients and strategic partners, laying for future scalability. While I'll defer to Craig to dive deeper into our go to market strategy and key customer wins for Q4 2023, I'd like to highlight a few recent wins.

Speaker 1

Notably, in Q4, we onboarded several new clients in our core geographies, including a prominent technology provider in Argentina, a leading tech company in Dubai and a Turkish bank. These successes emphasize our commitment to expanding our global footprint and forging impactful partnerships across diverse markets. Furthermore, our dedication and focus on enhancing our partner program, which was officially launched in the Q3, remains unwavering. In recent months, we have successfully integrated Avanza Solutions and Serban Group into our partner ecosystem. These strategic alliances are poised to bolster Aware's market presence in our target verticals spanning North America, LatAm, Europe, Northern Africa and the Middle East.

Speaker 1

In fact, our collaboration with Servan Group is already yielding promising results with 3 potential opportunities emerging as a direct outcome. This underscores our commitment to fostering mutually beneficial partnerships that drive growth and expansion across our focused verticals and markets. As previously noted in our quarterly updates, it's important to acknowledge that we do not intend to announce every contract secured or currently in progress. However, it's worth highlighting that Aware's leading technology and resilient partnerships continue to identify additional opportunities in highly competitive markets. Although there may be some fluctuations from quarter to quarter, we maintain a robust pipeline of opportunities in our backlog.

Speaker 1

Moreover, our solid foundation of recurring revenue serves as a stabilizing force, mitigating the impact of these fluctuations and providing a strong basis for future growth. Before discussing 2024, I'll turn the call over to David to take us through our financial results for the Q4 and the full year and Craig to review our go to market. David, over to you.

Speaker 2

Thank you, Bob, and good afternoon, everyone. Turning to our financial results for the Q4 and full year ended December 31, 2023. Total revenue for the Q4 was $4,400,000 compared to $4,100,000 in the same year ago period. The year over year improvement was largely due to higher software maintenance revenue. For the 12 months ended December 31, 2023, total revenue was $18,200,000 an increase compared to $16,000,000 in 2022.

Speaker 2

The increase in total revenue was primarily due to higher software license revenue. Annual recurring revenue or ARR as of December 31, 2023 increased to $12,000,000 compared to $9,700,000 as of December 31, 2022. For Q4 2023, recurring revenue was 3,700,000 or 82% of total revenue. The $3,700,000 in recurring revenue represented a 40% year over year increase. For the 12 months ended December 31, 2023, recurring revenue was $11,000,000 an increase of 13% compared to $9,700,000 in 2022.

Speaker 2

Looking at our operating expenses and operating loss, which include one time actions in 2023 and 2022 related to the $2,700,000 write off of our investment in Omnios Limited in the Q4 of 2023, The $800,000 one time gain in Q3 of 2023 related to the closeout of our contingent consideration related to our Fortress ID acquisition as well as the $5,700,000 one time gain related to the sale of the company's building in July of 2022. Our 4th quarter operating expenses were $8,900,000 up from $6,100,000 in Q4 of last year. Operating expenses for the 12 months ended December 31, 2023 were $26,800,000 up from $18,200,000 in 2022, which as mentioned earlier include the one time actions in 20232022. Operating loss for the Q4 of 2023 was $4,400,000 compared to an operating loss of $2,000,000 in the same year ago period. Operating loss for the 12 months ended December 31, 2023, was $8,500,000 compared to $2,200,000 in 2022.

Speaker 2

Now turning to GAAP net loss, which also includes the one time transactions mentioned earlier. For the Q4 of 2023, GAAP net loss totaled 4,200,000 dollars or $0.20 per diluted share compared to GAAP net loss of $1,800,000 or $0.08 per diluted share in Q4 of last year. For the full year of 2023, GAAP net loss totaled $7,300,000 or $0.35 per diluted share compared to GAAP net loss of 1,700,000 or $0.08 per diluted share in the prior year. Our adjusted EBITDA loss for the quarter totaled 1,300,000 dollars which compares to a loss of $1,500,000 in the same year ago period. The year over year improvement in adjusted EBITDA was primarily due to higher revenue.

Speaker 2

For the 12 months ended December 31, 2023, adjusted EBITDA loss totaled $4,600,000 an improvement compared to an adjusted EBITDA loss of $5,200,000 in the prior year ago period. At our balance sheet, we ended the quarter with $30,900,000 in cash, cash equivalents and marketable securities compared to $29,000,000 at the end of the prior year. As we're able to collect on our IRS carryback claim of $1,500,000 and close out a long term services project that was previously an unbilled revenue. As part of our previously announced share buyback program, which we extended to December 31, 2025, we repurchased 299,780 common shares of stock at a cost of $500,000 during the year. Entering 2024, we are backed by a strong cash position and balance sheet that offers us the flexibility to evaluate all ROI opportunities with the potential to expedite our growth strategy.

Speaker 2

That completes my financial summary. And now I'd like to turn the call over to Craig to discuss the progress we made on our go to market initiatives. Craig?

Speaker 3

Thanks, David. 2023 proved to be an important year for Aware as Bob highlighted earlier and as we expected it would be. Throughout the year, we remain steadfast in our commitment to scale through strategic partnerships, expand and retain our core customer base and business segments and advance the product market fit of Aware ID. These concerted efforts contributed to our exceptional performance and set the stage for continued growth and success in the future. During 2023, we further advanced our go to market strategy by strategically investing in key areas of our business.

Speaker 3

We prioritized front end investments, introducing a series of product enhancements across our portfolio in the latter part of the year, guided by valuable feedback from our customers. Additionally, the formal launch of our partner program in Q3 and the optimization of our organizational structure were pivotal in our ability to achieve our financial goals for 2023. These initiatives collectively strengthened our market position and propelled our success in the year. Since the launch of our formal partner program in the Q3, we have been actively expanding and refining our partner ecosystem to maximize its impact. Central to this effort was the development of a dedicated partner portal where partners can access enablement and co marketing materials to increase their knowledge and selling power of Aware solutions.

Speaker 3

Presently, our partner network is comprised of 65 active partners with 2 notable additions in Q4, namely Servin Group and Avanza Solutions among others. These partnerships bolster our market reach and underscore our commitment to collaborative growth and success. In November, we added Servant Group to our partner program. Servant Group is a leader in integrated digital technology business consulting and support and has deep connections with financial service firms, governments and commercial enterprises across LatAm and Europe, which we expect to leverage to amplify Aware's presence in these high growth markets. In fact, we already have 3 opportunities in conversation that stemmed from this new relationship.

Speaker 3

Another recent addition to the partner program was Avanza Solutions. With their regionalized, trusted and specialized expertise across the Middle East, our collaboration with Avanza Solutions will be instrumental in helping us scale and maximize opportunity in the Middle East region. In fact, economic data points to the Middle East becoming the fastest growing region in the world for financial services and e commerce. This presents a tremendous opportunity for Aware. In addition to expanding our partner network, we successfully onboarded several new customers this quarter across key regions such as the Middle East, Latin America and beyond.

Speaker 3

As Bob mentioned earlier, notable additions include a technology provider in Argentina, a tech company in Dubai and another Turkish bank to our portfolio. Here at home, we have partnered to be the foundational technology for ITI, a company deploying self serve DMV kiosks across the U. S. Furthermore, our collaboration with PeopleSERVE has significantly enhanced our global online presence and expanded Aware's use cases. By partnering with PeopleCert to combat proxy testing fraud, Aware is tapping into a vast market opportunity.

Speaker 3

PeopleCert administers millions of exams across more than 200 countries and territories, offering us an extensive platform to increase our market share and drive growth in this burgeoning sector. With our partnerships and customer relationships continuing to generate increasing momentum in markets across the globe, we are confident we have built a strong foundation that we can leverage to drive future ARR. As we enter 2024, our team's initiatives center on continuing to sharpen the focus of the product market fit for our SaaS based platform, driving incremental subscription based revenue and leveraging our partner ecosystem to capitalize on our increasing pipeline of opportunities in our core and target markets. I'd now like to turn the call back to Bob for additional discussion on 2024. Bob?

Speaker 1

Thanks, Greg. We've entered 2024 with 12,000,000 in annual recurring revenue, which is approximately the same amount of total revenue the company generated when I began this transformational journey at the end of 2019. The shift from a short term book and ship company to a recurring revenue machine is now beginning to pay off and will continue to pay off as evidenced the positive cash flow achieved for the first time in years. Our go to market strategy in 2024 will center around our enabled partner ecosystem and targeted use cases for a robust biometric identity platform. We will focus on sustainable growth for scale, both in expanding and upselling our existing customer base and in adding new logos.

Speaker 1

We'll continue to prioritize quality ARR over one time revenue and we'll still anticipate quarterly fluctuations due to specific timing of awards. Furthermore, we will be maintaining our commitment to business efficiency as we build towards profitability. In fact, we further reduced our annual operating costs by more than $1,000,000 in Q1 of 2024. This was made possible by leveraging our engineering resources our efforts to optimize our product lines, go to market strategy and targeted product market fit. Of course, if an opportunity arises that warrants additional investment, we are ready and able to address it given our available cash resources.

Speaker 1

Building upon our solid performance and the solid foundation established in Q4 and 2023, we're confident that Aware is well positioned to sustain its momentum and drive additional recurring revenue, paving the way for continued double digit growth and success in the coming year as we build towards profitability. We appreciate everyone's continued support. And with that, we'll now open the call to questions. Matt, please provide the appropriate instructions.

Operator

Thank you, Bob. First question, Craig, last quarter you mentioned gaining momentum within the gaming space. Can you provide an update on the traction you were seeing?

Speaker 3

Yes, absolutely. Yes, we've been working diligently to expand our presence in the gaming market. We've been working with strategic partners in the space on potential co marketing and integrated product opportunities. And while not in Q4 events, we started 2024 with partners gaming events in January and a global gaming trade show in February. We have several additional events in the gaming space lined up for this year.

Speaker 3

We're also extremely excited by the launch of our WordPress and WooCommerce integration. These are platforms that are used by a large number of gaming and retail companies globally. WordPress is one of the leading website management platforms with tens of millions of websites worldwide. Our no code WordPress plugin sets the stage to expand in the use cases with other sites in other industry verticals as well. By leveraging WordPress' WooCommerce technology, our integration opens the door for any sites in any vertical that use this market leading platform to process e commerce transaction.

Speaker 3

So back to the specific question in hand though, overall the response in the gaming space has been enthusiastic about our offering.

Operator

Thanks, Craig. Couple of questions about an article from Biometric Update published in May 2021 about Imprevada launching facial biometrics for healthcare through AWARE and IDEMIA partnerships. 1st, is IDEMIA still involved or is it just Aware? 2nd, why has the rollout taken so long? And finally, is Aware compensated on a per facial recognition transaction or is it a flat fee?

Speaker 3

Sure. We partner in a multiple ways with different partners and Improvada is an integrated reseller of our facial recognition product. The go to market and adoption is the responsibility of Improvada and the consumers of the Improvada product. Our focus is supporting our partners in the way they need to go to market. We are also partnering with them from a growth standpoint based on our usage based pricing.

Speaker 3

So we are excited by the initial partnership and the direction it has.

Operator

Thanks, Craig. David, in Q4, the company generated $3,700,000 in recurring revenue. How much of that was subscription versus maintenance?

Speaker 2

Thanks, Matt. So of the $3,700,000 in the recurring revenue, about 40%, which was about a 40% growth from the prior year quarter, The subscription based revenue contributed about $1,500,000 while the remaining $2,200,000 came from both new and prior maintenance contracts. And importantly, this included the conversion of a legacy customer to a multi year subscription contract during the quarter.

Operator

Thanks, David. The next question, the sale of Aware's Noomi system to PeopleCert seems to be fully implemented. Was this brought online during the Q4 quarter? Is this a one time sale with residual annual maintenance recurring revenue stream? There potential revenue growth with this relationship?

Speaker 3

Yes. Great question, John. PeopleCert did go live in Q4. This is not a one time sale, but a subscription based engagement that will grow as their business and the use of Aware grows. We're very excited by the opportunity for future growth that we have with them and partners like this that are part of our recurring revenue growth model.

Operator

Craig, another one for you. Can you comment on the ID authentication product Aware has provided to Improvada? Is this primarily an Aware ID recurring revenue implementation? When do you expect revenue from this sale? Do you expect revenue from Improvada to become a significant revenue source?

Operator

And lastly, is Aware uniquely suited to enable DEA compliance or is this achievable with other authentication products also?

Speaker 3

This is a recurring revenue stream. They are leveraging Aware products, but not specifically Aware ID for this deployment. Strength of Aware is that our products can be configured for a wide range of use cases and specific industry engagements as well as either a SaaS or on prem solutions. The DAA compliance is the responsibility of Improvada in this situation.

Operator

Thanks, Craig. Another one, how are you measuring performance in the partner channel?

Speaker 3

Yes. As we've discussed previously, our ecosystem hub serves as a central resource for our partners to access co marketing, sales enablement and training materials. In addition to the portal as a valuable resource for both new and established partners, the program itself also facilitates comprehensive metric tracking. The meticulously track various metrics like the volume of active projects, the pipeline level of each partner and the volume of new engagements to name a few. These metrics serve as a key performance indicators, enabling us to assess the effectiveness of our ecosystem continually.

Speaker 3

The addition of a rev ops resource last year has helped us considerably on building out the reporting and process mechanics. We also began to search for a head of partnerships to oversee the strategic arm of our go to market. I am extremely excited to announce that Todd Jarvis has joined us to lead our global partner efforts. Todd has had extensive experience building and expanding global partner ecosystems with startups to enterprise tech companies. He's engaged and started this week.

Speaker 3

We are looking forward to the impact he will have across our organization and partner ecosystem.

Operator

Thanks, Craig. Bob, in 2023, the company exceeded expectations to grow ARR by at least 15%. How are you thinking about momentum in 2024?

Speaker 1

Well, it's a great question. I figured somebody would ask. So our strong performance in 2023, especially the 23% growth in ARR really demonstrate the impact of our business model $12,000,000 of annual recurring revenue and this is about the same amount of total revenue we're generated when I joined the company at the end of 2019. And building upon the solid performance and solid foundation, the baseline that was established in Q4 and 2023, we're confident that Aware is well positioned to sustain its momentum and drive additional recurring revenue. And we're looking for this to pave the way for continued double digit growth and success in the coming year as we build towards

Operator

profitability. Thank you, Bob. Craig, on the call you highlighted a recent partnership with ITI, which is expanding Aware into the testing market. Can you share what other industries are you targeting in North America?

Speaker 3

Absolutely. I'm happy to speak more generally regarding our approach to targeting. Our targeting is really twofold based on geography and industry vertical. We have worked hard to establish footholds in LatAm, North America and the Middle East. Based on geography, we focus on relevant industry verticals for the region.

Speaker 3

For example, as you know, financial services is a target in LatAm and the Middle East. We've shared gaming is a target across all our target geographies. Of course, we have our government targets to build on strong foundations in North America and Europe as well. We continue to disrupt the law enforcement space in the U. S.

Speaker 3

With our Aware Avis offering. We are planning to maintain our position and look to grow in a number of other verticals here in North America and around the world through our partner ecosystem and direct.

Operator

David, Bob mentioned that you further reduced annual operating costs by more than $1,000,000 in Q1 2024. What can you tell us about the recurring operating costs you anticipate?

Speaker 2

Thanks, Matt. So we continue to be focused on revenue growth and really specifically the recurring revenue that Bob mentioned earlier. But we also need we're also maintaining kind of the discipline in our spending. So with the changes we've made in the past few quarters, we'll continue to drive towards profitability. Based on the timing of the actions over the past few quarters, including some that we made in the Q1 of 2024, we should begin to see the cost savings benefits of that $1,000,000 that Bob talked about in the Q2 of this year.

Speaker 2

And that was in addition to some of the cost saving initiatives we did in the second half of last year.

Operator

Thanks, David. Craig, what can you share about legacy customer conversions?

Speaker 3

Sure. First, let's start with me being really clear that we are actively looking at new logos to our customer base and partner ecosystem. That said, as we emphasized our subscription first business model, our primary focus was on expanding our recurring revenue streams. During 2023, we intensified our efforts in this regard by leveraging our newly formed customer success model. Our team is in perfect position to show our customers the advantage of a subscription based model versus license.

Speaker 3

The feedback has been positive on all sides and we are having increasing success converting legacy customers through subscription models. This brings more predictability for us as well as our customers. In one example, during the Q4, we converted a significant legacy OEM to an annual subscription, which will continue to help minimize quarter to quarter fluctuations. In 2024, we are incentivizing our teams to drive additional subscription revenue and take advantage of our cloud offering.

Operator

Another one for you, Craig. Last quarter, you brought in a revenue operations expert. What changes has this had on the company's sales process?

Speaker 3

You bet. I talked a bit about our rev ops person earlier. In Q4, we brought her in to help focus on upgrading our sales technology and processes to give us a 360 gs degree view of our customers. The impact so far has been tremendous. The advantage is that all members of Aware can now see what is happening with our customers and partners in near real time.

Speaker 3

We have also been focused on marketing to sales lead flow process and handoff, which is critical for a growing business. This again is a combination of process and technology to ensure that we can track leads from first touch to close to 1 opportunities. This visibility and the corresponding KPIs give us the ability to invest and focus in specific areas of the funnel to improve our follow-up, messaging and overall impact throughout our lead funnel.

Operator

And Craig, from a technology perspective, what areas are you focused on in 20

Speaker 3

24? We continually advance AWARE's technology by adapting to and anticipating market demands. Following numerous product enhancements this year, we are confident in the robustness of our industry recognized biometric identity platform, capable of effectively addressing current challenges while maintaining top tier security and enhancing user experience. We are poised to further expand our reach and product adoption of our industry recognized biometric identity platform family of offerings through the introduction of bespoke tools tailored to the unique requirements of our target sectors. These include financial services, gaming, access control and online certification and testing.

Operator

Thanks, Craig. Our next question, could you see a positive impact to your business based on any of the proposed or potential solutions to the border in a legal immigration problem?

Speaker 3

Absolutely. This is where we've had global experience with this. It is hitting home more right now, but we have worked with global governments as well as the U. S. Government and where we saw other areas where there was a large influx of immigrants, we see transactions spike up.

Speaker 3

So the need for additional services, additional technology as well as our usage based pricing, which is based on transaction also goes up. So yes, this will have typically will have an impact on our bottom line.

Operator

Thank you, Craig. At this time, this concludes our question and answer session. If your question wasn't answered, please e mail Aware's IR team at awregatewaygrp.com. I'd now like to turn the call back over to Bob for closing remarks.

Speaker 1

I'd like to thank everybody for joining us on today's call. I'd also like to thank our employees, our partners, our shareholders for the continued support that they provide. And as a reminder, you may learn more about our strategy in the investor presentation that's available on our website. We look forward to updating you on Awehr's progress on our next call.

Speaker 3

Over to you, Matt.

Operator

Thanks, Bob. I'd like to remind everyone that a recording of today's call will be available for replay via link in the Investors section of the company's website. Thank you for joining us today for Aware's Q4 and full year 2023 conference call. You may now disconnect.

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