Aware, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Matt Glover:]

Good afternoon and welcome to Aware's Fourth Quarter and Full Year 2020 Earnings Conference Call. Joining us today is the company's CEO and President, Bob Eckel; and CFO, David Barcelo. Following their remarks, we will open the call for questions. If you’d like to submit a question, you can do so at any time using the built-in ask a question feature in the webcast player. Before we begin today's call, I would 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.

[Bob Eckel:]

Thanks for the introduction, Matt. Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and full year ending December 31, 2020. A copy of the press release is available in the Investor Relations section of our website. As many of you know, this is our first earnings call as the new Aware. We are thankful for the opportunity to share what we've been up to for the past year. We're also excited to share with you our new strategy to accelerate growth and rapidly scale. In the future, we expect to enhance our investor engagement initiatives by hosting quarterly earnings calls, participating in financial conferences and having a more frequent conversation with our investors and analysts. On this call, I'll provide you with a high-level overview of this quarter's operational results; turn it over to our CFO, David Barcelo, to review our financial results for the quarter and the full year. And lastly, I'll take some time to share what we've been up to and where we're going. And after that, we'll open the call for questions. This quarter we generated our second consecutive quarter of revenue growth, as well as a 40% year-over-year quarter increase in revenue. This was driven by our nearly doubling of our overall pipeline and a quintupling the size of our subscription revenue. Equally important, we ended the year by completing our first acquisition. I'll touch on our acquisition of Maxar's AFIX product suite in more detail a bit later, but the transaction was immediately accretive and providing us with a strategic IP portfolio that enables us to expand and serve a diverse set of customers.

[David Barcelo:]

Thank you, Bob. Good afternoon to everyone on the call. All right. Now, let us turn to our financial results for the fourth quarter and full year ended December 31, 2020. Our total revenue in the fourth quarter increased 40% to $3.4 million from $2.5 million in Q4 of last year. Sequentially, revenue increased 38%, up from $2.5 million in the prior quarter. Both the sequential and year-over-year increases were primarily due to higher software license and subscription revenues. For the full year 2020 our total revenue decreased 7%, to $11.3 million from $12.2 million in 2019. The year-over-year decrease in revenue was primarily due to lower services revenue related to a multi-year international project signed with a systems integrator in the second quarter of 2018, which was partially offset by higher subscription revenue. Turning to our operating expenses. For the fourth quarter of 2020, our operating expenses increased 26% to $5.3 million from $4.2 million in Q4 of last year. For the full year 2020, our operating expenses increased 27% to $20.7 million from $16.4 million in 2019. The quarterly and annual increase was primarily due to an investment in sales and engineering resources as we scale to execute on our growth strategy. The annual increase also includes $1.2 million of nonrecurring expenses including in the first half of 2020 related to severance payments, recruiting fees and COVID-19-related charges. The corresponding operating loss for the fourth quarter of 2020 was $1.9 million compared to an operating loss of $1.7 million in the same year ago period. The year-over-year increase in operating loss resulted primarily from higher total costs.

[Bob Eckel:]

Thanks Dave for reviewing our company's financials. Prior to joining the Aware team as a CEO just over a year ago, I worked strategically with the Aware's management team as a consultant. At that time, the company had a reputation as the biometric middleware go-to partner for some of the world's most renowned government agencies. I saw a great deal of potential upside and scale in the company and reputation focusing on the product offerings and growing the commercial customer base directly and through channel partners. I've dedicated my early tenure to enhancing Aware's market profile and addressing these opportunities along with building our team. For those of you that are new to the story, I would like to take a little bit of time to explain why Aware's excellent reputation is warranted. Simply put, Aware is built on a 30-year plus foundation of success and trusted by over 100 commercial leaders, 80 of the world's most premier government agencies, 20 industry partners and 20 countries.

[A - Matt Glover:]

Thank you, Bob. Our first question is the combination of AFIX with AwareABIS and Aware's Astra enables quick turnkey deployments for customized solutions to keep communities safe no matter their size. Please define the transaction in terms of personnel, sales, and revenue, and cost of acquisition? Are there current examples of the scope of business opportunities resulting post acquisition? Bob?

[Bob Eckel:]

Thanks Matt. Thanks for the question. The global law enforcement software market is over $10 billion and the acquisition of AFIX provides Aware with a strong customer base and it gives us over 180 agencies to grow our market share and sell both AFIX and the AwareABIS products. So, we feel by combining the two product families and leveraging the expertise of the seven members of the AFIX team, Aware will be able to serve the ABIS needs both large and small law enforcement agencies and an addressable market estimated at about $200 million.

[Matt Glover:]

Thanks Bob. Our next question. Please differentiate the AFIX combination with Aware's press release from January 26, 2021 wherein Aware states with launch of AwareABIS Aware offers a modular ABIS product designed for civil and criminal applications.

[Bob Eckel:]

The acquisition of AFIX targeted ABIS applications for smaller scale law enforcement agencies. Think of it in terms of like 15,000 to 2 million subjects where the AwareABIS product introduced in January 26 press release is designed for larger-scale law enforcement agencies from about 1 to 30 million subjects or more and also applications in civil identity and national security. We know there's some overlap but each product set is designed with a different philosophy and target customer base in mind. Aware is now the only company that can effectively address and support deployments to all segments of the global ABIS market from small to medium to large and even very large.

[Matt Glover:]

Thanks Bob. Our next question why can't Aware offer its ABIS software to California and the other 49 states at no cost and charge a monthly fee for every employee? So, if Aware could charge $0.60 to $1 per month per employee to prevent unemployment fraud, it would save the State of California billions of dollars and would generate millions for Aware. If Aware could encrypt in biometric data -- or the biometric data of the employees in the system and for the employees filing unemployment claims it would eliminate any objection from parties arguing their civil rights had been violated.

[Bob Eckel:]

Well, the company is actively pursuing all high-value opportunities to scale the business. But we also recognize that there are regulatory challenges associated with establishing new government-use applications. However, that being said, one of our objectives is to establish prime integrator partners and we've talked about some of the partners and what we're doing in the release and in just the call a few moments ago where we provide the technology for them to pursue and to use these in large government opportunities. There's a lot of opportunities. There's a lot of proposal and extra work that goes into it and we feel that the prime integrators are better positioned but we have the technology that will support these initiatives.

[Matt Glover:]

Thanks Bob. Aware has a blockchain patent issued in 2020? Is Aware making any marketing efforts in the blockchain sector to advantage of the patent -- to take advantage of the patent excuse me?

[Bob Eckel:]

At any given time, we're actively evaluating multiple innovations and market verticals where we can apply and use biometric technology. So, that's why I spent time and we have built over the years prior to me a team with some of the best and brightest biometric research and applied engineering talent out there. And so when innovation rises to this level of unique differentiation, it causes us to believe we can be a leader in the technology or the application then we go and we file a patent. We have an active patent program here. From there, it's commonplace not to disclose any of the progress on our technical advances and the market offerings until we bring them to market. So, yes, we still have the patenting question, but I'm unable to discuss the current activities that may leverage that specific piece of IP.

[Matt Glover:]

Thanks Bob. Our next question is LifeLock is a billion dollar company direct to the public protecting people's identities. In addition to Aware marketing to business and governments, Aware should consider offering biometric identity protection to the public could call this Awareness and offer at a lower price than LifeLock. Company could then use this customer base to market to banks retailers, credit card companies, et cetera.

[Bob Eckel:]

So, I'm just trying to think of -- I kind of answered some of the question. We're actively pursuing these high-value opportunities to scale our business. And as you know our current focus is on government and business commercial sectors. However, we're monitoring and we're evaluating some of these other opportunities but we're also weighing the challenges associated with establishing new applications direct-to-consumer. So it's very different than B2G and B2B. But we are committed to our transformational growth strategy and to providing shareholder value, regardless of the specific market segment. So I do like the question. And obviously, we'll look at that. We just want to understand the risks and the – versus opportunities.

[Matt Glover:]

Thanks, Bob. The next question. The last time the company had a conference call was in 2014. At that point the company said, they were going to split into two, one company handling all of its patents and related licensing. What has become of this?

[Bob Eckel:]

Well, while it's difficult to know the details of the initiatives that you're referring to, it predates me and most of the current executive team. We do have a strong IP portfolio and we're committed to leveraging our IP, as we work to accomplishing the goals and the transformation we set forward in the call. So I don't have any further discussion around splitting things into two or any of that at this time.

[Matt Glover:]

Our next question. Can you explain the recent activity around Aware's stock over the last couple of days, specifically with respect to volume?

[Bob Eckel:]

We're unable to understand why there's been an increase in stock price and trading volume over the past few days. And I just don't want to speculate at all.

[Matt Glover:]

Thanks, Bob. Our next question. You mentioned taking measurable and necessary steps in relation to rapidly scaling the business and driving value for shareholders. Can you elaborate on this and/or provide examples of such steps?

[Bob Eckel:]

Yes. As I stated earlier, we took the necessary steps to invest in management and the team, management systems. Some of the systems that I inherited were over a decade old. Adopt new standard processes to aid in speed and scalability. We converted to agile, development methodologies. We've added a program office to embrace larger programs and delivery more efficiently and faster and then provide quicker responses back to our customer on our standard value products and programs. Also we're investing in our employees and growing our front-end of the business and the staffing levels as we plan. So right now we're staffed at a level that we anticipate we are at the right level. We're always looking for a couple good people relative to business development and sales, engineering and research, but I believe we're at the right level to grow what we need to.

[Matt Glover:]

Next question. This one is for you Dave. You mentioned 5 million Knomi transactions in the quarter. How do you recognize revenue from those transactions? And where is it in the income statement?

[David Barcelo:]

Yes. Thanks Matt. Yes. So the 5 million Knomi transactions are part of – just in general we're disclosing more and more information on our subscription revenue in our earnings announcement. But our financial statements we disclose revenue there based on materiality and we continue evaluating that regularly with our adviser. So right now the subscription revenue that relates to those transactions all sit within our licensing revenue segment.

[Matt Glover:]

Thanks, Dave. Sticking with you here for a minute. Can you elaborate on the dynamics for consumption-based SaaS revenues? Are you charging customers on a per transaction basis? And how are customers charge for their use of the platform?

[David Barcelo:]

Yes. So it's per transaction and per user. For example our Knomi offering, we allow customers to consume both per user and per transaction basis in addition to what was previously offered which was the more standard enterprise license. So this business model then has some tiered pricing. Customers choose various volume tiers of either the transactions for the users and then they consume that throughout the year and we reset the counter on each anniversary.

[Matt Glover:]

Thanks, Dave. What are your capital allocation priorities? How do you determine whether an investment has a sufficient return?

[David Barcelo:]

Yes. We're fortunate to have a nice strong balance sheet here, particularly our cash balance. And so now that we've completed our first phase of investments that Bob talked about and we've positioned the company to scale and grow, we now look to invest in our long-term growth opportunities, things that are more aligned with our long-term growth strategy. Bob spent some time there outlining on the call what our growth strategy is. So therefore investments will align with that and we'll judge ROI-based off of how well it aligns to our strategy. So for instance building on our biometric expertise with our focused offerings, transforming to SaaS to address some of the consumption-based customers and then of course breaking into adjacent markets.

[Matt Glover:]

Thanks, Dave. Bob this one's for you. Will you be providing quarterly or shorter-term guidance?

[Bob Eckel:]

Well, I think everybody that's been with Aware or looking to invest with Aware, our objective is long-term growth. So growing the top line, taking advantage of the growth in the biometrics market. We don't plan to currently issue quarterly or yearly guidance. However, we're going to keep our investors apprised of our transformational progress and through our retained Investor Relations, which we have with Matt here and team at Gateway and these quarterly conference calls.

[Matt Glover:]

Thanks, Bob. As someone else pointed out, the last time the company had a quarterly conference call was in 2014. Why did you decide to start doing these again now? Is there any significance behind the timing?

[Bob Eckel:]

As I mentioned earlier, I joined Aware as the CEO just over a year ago and have dedicated my early tenure to enhance Aware's market profile and address the opportunities that are presented to it, along with building a team. So I spent a lot of time doing that. Part of the enhancement to our market profile was the introduction of a formalized Investor Relations program with the support of Gateway, thank you Matt and team, as we shared in our September 28, 2020 press release. So in that release, we shared together -- shared that together, we're going to be focusing on developing and deploying comprehensive outreach communications program, engagement that we just started launching in late September with Gateway. I felt and Gateway felt this is the -- really, the first opportunity for quarterly earnings call. Other than that, timing alignment, there's no significance behind starting the calls now, but we do look forward to maintaining the quarterly cadence in the future.

[Matt Glover:]

Thanks, Bob. How do you see yourselves competing or working with larger corporations like Apple and Amazon, who are getting more involved with biometric hardware and software?

[Bob Eckel:]

Well, we see companies like Apple and Amazon serving different needs in the market. We focus on liveness and complex workflows, optimize between security and low friction. Additionally, we're not limited to authentication. We've got a portfolio of biometric assets that play together to serve the entire biometrics value chain. That includes authentication and proofing and verification and identification, for both civil and criminal applications. Our understanding is that's not the focus of the Apples and the Amazons of the world.

[Matt Glover:]

Thanks, Bob. Can you shed some more light on when we'll see the transformation pick up speed? What are some indicators that we've been through the bulk of the transformation? Should we expect to be seeing subscription revenue overtake license revenue in a few quarters, a few years?

[Bob Eckel:]

Well, while we've been aggressively pursuing our subscription revenue and building a backlog of recurring revenue. Again, I'll say, our objective is long-term growth, growing the top line, taking advantage of the growth in the biometrics market. And -- so, as such, we're not prescriptive about the mix of the revenue lines. I mentioned, we started and set up a program office to address programs and projects that add value to bigger customers. So -- but to keep our investors apprised of the transformation, we've highlighted the growth in a number of subscription transactions that Dave just talked about and we'll continue to do so, as we continue transforming, to make you aware of the adoption rates, the best we can and what we're seeing out there.

[Matt Glover:]

Thanks, Bob. Our next question. I'm wondering what your team thinks about the impact of associated processing units, or APUs, on the facial recognition market? Does this hardware increase the TAM by making it easier to do facial recognition queries at scale?

[Bob Eckel:]

Well, the simple answer is, no. While there may be a positive correlation between the total addressable market and increased use of APUs in handling facial recognition queries. We don't believe this to be a casual relationship. In other words, there are relatively few applications that would require hardware acceleration that the APUs would provide. In a worst case, we've assessed our customers' need and determined that hardware acceleration is not necessarily to best serve them at this time. I mean, we've got high-speed systems for liveness and matching and the others. And depending on the use cases, it's been good. We're always working on speed, of course. But remember, a lot of it's become moved out to the edge devices and we're very cognizant of that. But as all technological trends happen, we're continually monitoring and we're always listening to our customers, so we can implement these advancements if and when they become necessary.

[Matt Glover:]

Thanks, Bob. At this time this concludes our question-and-answer session. We recognize there are still some questions outstanding, but we're out of time. If your question wasn't answered, please e-mail Aware's IR team at [e-mail]. I'll now turn the call back over to Bob for closing remarks. Bob?

[Bob Eckel:]

Yes. Thank you. Thank you, Matt. And I'd like to thank everyone for joining us on today's call. We're looking forward to maintaining the quarterly call cadence. We're excited about announcing that a new investor presentation is going to be soon made available on the Investors section of our website. So we've been working on that for a while and that will give you some insight into further where we're going. And I especially want to thank our employees at Aware, all of our partners that we've been signing up and working with, of course, the investors, for your continued support and we look forward to updating you further on our next call. Matt, I'll turn it over to you.

[Matt Glover:]

Thanks, Bob. I would like to remind everyone that a recording of today's call will be available for replay via link available in the Investors section of the company's website. Thank you for joining us today for Aware's Fourth Quarter and Full Year 2020 Earnings Conference Call. You may now disconnect.