Aware, Inc. (AWRE) on Q2 2021 Results - Earnings Call Transcript
Matt Glover: Good afternoon, and welcome to Aware’s Second Quarter 2021 Earnings Conference Call. Joining us today is the company’s CEO and President, Robert Eckel; and CFO, David Barcelo. Following their remarks, we will open the call for questions. 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. Aware wishes to caution you that their factors that could cause actual results to differ materially from the results indicated by such statements. These risks and uncertainties are also outlined in the company’s SEC filings, including its Annual Report on Form 10-K and quarterly reports on Form 10-Q.
Robert Eckel: Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. After the market close, we issued a press release, announcing our results for the second quarter ending June 30, 2021. Copy of the press release is available in the Investor Relations section of our website. On our third earnings call together, I am proud to report there we continuing to see the initial impacts of the restructuring that we began just over 18 months ago. I am thankful for the opportunity to address all of you and reiterate why we believe Aware is poised for rapid growth in the coming years. Today, I planned to discuss the progress we’ve made throughout the second quarter. And why are we looking forward to what is ahead. On this call, I provide you with a high level overview of this quarter’s operational results. I will then turn it over to our CFO, Dave Barcelo, to review more of the details on the financial results for the quarter. And then take some time to discuss what we have on the near and long-term horizons. After that, we will open the call for your questions. In the second quarter of 2021, we made several key advancements on ongoing initiatives that have and will prepare us well for our future. One of the most notable is the successful integration of the AFIX product line, which we acquired in November of last year. Financially, we are seeing an immediate top line uplift, which will pay for itself in a relatively short time span. This quarter also marks the fourth consecutive quarter of record Knomi transactions with the more than 18 million transactions in the first half compared to 11 million in all of 2020, we’re already at 5 times the number of transactions in the first half of 2020.
David Barcelo: Thank you, Bob. Good afternoon to everyone on the call. Let’s turn our attention to the financial results for the second quarter ended June 30, 2021. Our total revenue in the second quarter was up 2.3 times the same year ago period, the $4.3 million, up from $1.9 million in 2020. This compares to revenue of $4.4 million in the first quarter. Year-to-date, for the six months ended June 30, 2021, our total revenue increased 61% to $8.7 million, up from $5.4 million in the same year ago period. The increase in revenue was primarily due to increase subscription-based revenue from growing transaction volume with existing customers and the upfront recognition of fixed minimum transaction amounts from two new international wins. With regards to our operating expenses for the second quarter of 2021, our operating expenses increased 4% to $5.8 million from $5.6 million in Q2 of last year. For the six months ended June 30, 2021, our operating expenses increased 12% to $11.7 million from $10.5 million in the same year ago period. The quarterly and six-month period increases are due primarily to sales and marketing resources acquired in our AFIX acquisition. Corresponding operating loss from the second quarter of 2021 was negative $1.5 million compared to an operating loss of negative $3.7 million in the same year ago period and improvement of 58% over last year.
Robert Eckel: Thanks, Dave. Last year, when we began ramping up our diligence on acquisition targets, we were particularly looking for opportunities that would be both immediately accretive and synergistic with our business transformation. AFIX, which provides turnkey face and fingerprint biometric matching and forensic analysis software for small to medium-sized law enforcement and government agencies fit those criteria.
A - Matt Glover: Thank you, Bob. First question is, can you elaborate on the scope of business opportunities resulting in the AFIX acquisition? You mentioned bids being reviewed that wouldn’t have been without the street cred of AFIX. What do you mean by that? Bob?
Robert Eckel: Thanks, Matt. Well, the global law enforcement software market is over $10 billion and the acquisition of AFIX provided Aware with a strong customer base of over 180 agencies to enable us to grow our market share and sell both AFIX anywhere ABIS products. So by combining both of the product families and leveraging the expertise of the AFIX team, we’re able to serve the ABIS needs in both large, small and medium addressable markets, which is addressed, it’s estimated around a couple hundred million. But prior to the AFIX acquisition, we wouldn’t get a shot at presenting our solution because of basic reference requirements of the tenders. So we had to describe active deployments, customer references, and with the AFIX fully integrated into the ABIS family, we’re able to lean on those deployments and we call them street cred to continue and use the same word. It passes the initial gatekeeping round of reviews. So once we’re passed the gatekeeper, we’ve been able to highlight how valuable Aware ABIS is. And we are in active discussions around potential deployments of the offering. So it’s helped us a lot get in the door and a bunch and then it’s also helping us expand in that area as well.
Matt Glover: Great. Thanks Bob. Venture capital dollars have poured into biometrics. How does Aware intend to compete with these new competitors?
Robert Eckel: Okay. Well, that’s a great question. Thanks for asking. Mike, let me kind of step back a little bit and put it into the competitors that we’re really looking at. So the bigger players and the end-to-end identity providers, like the large companies that are well-established and have established solutions and market share that’s category one. Then you got the point solution or the use case providers, two, and then the new entrants and small companies. And so what we see or what we’re seeing is a lot of private equity and venture investing in the last two areas. And as we monitor the market, we’re seeing new entrants or small companies falling into one of three areas. And this is where we compete differently is the use case specific entrance. So that’s a company that identifies a particular problem, focus, develops a specific purpose using biometric technology. Then you’ve got a couple of other companies that are entering focused on vertical markets. They pick a specific or a single vertical and focus and address as many use cases as they can for biometrics in the vertical. And then the innovators or inventors, these entrants have a breakthrough or core new technology, very feature focused and look for ways to commercialize their new technologies. So interestingly enough, these entrants are critical to the growth of the industry and bring useful and new perspectives to it. But they also need time to mature and validate their business models and address risk. It’s not easy to take market share from well-established or players already in production. And so we have deep production roots along with deep references and credentials as well. So with that, we look at the competitive pressure of the new entrants to give us some emphasis for continuous breakthrough innovation along with introducing monetization of that. So we acknowledged there being resource by the VCs and are forced to be reckon with, but they also enable us to help validate the market and the credibility within the market that we’re in. We realized that there’s a long road to viability of monetizing an idea that comes in. So these new entrants will be challenge to find the right business model. Do they have the right model? Do they have the right pricing? We at Aware have tested our markets and we’ve established a good understanding of these challenges, we also manage and evaluate new entrant technology compare relative to performance. And we have resources dedicated to the research to retain our leadership, but we also have access to voice of the customer through our installed base and through other market research that we do to provide the thought leadership. And so we focus on an adaptive competitive model. We remain as nimble as possible to compete by adapting to the needs of the marketplace. So as we go, we can see there’s different modalities and single modalities that come in. And I know this is a long answer, but it is helping to validate our market, they’re funding companies in the space suggest that there’s good promise, but we’re focused on not just one particular single modality or area, but across the Board and that is helping us again secure customers and in this quarter and then in the future, we’re expanding the base that we’ve already established with additional modalities and additional case capabilities. So as I know, it was a long answer, but there was a lot to that. But so it’s a good, and it’s a bad, but mostly on a good side, because it validates the market that we’re in and keeps the market turning.
Matt Glover: Thanks, Bob. Number of questions were submitted around the potential sale of the building in Bedford. Instead of reading them all individually, Dave, can you provide more color around potential sale of the building in Bedford and the status to date?
David Barcelo: Yes. Of course, Matt. So for some time we have been evaluating our office space and looking to optimize, because we’ve been under utilizing the space that we currently have in our building, which is about 72,000 square feet or so. And earlier this year, back in January, February, we received two unsolicited offers to purchase the building. So at that point in time, we worked with the broker and we did diligence on both of the companies. We did some diligence on the surrounding area and what buildings we’re going for. And we also talked to several companies with sale-leaseback offers. But in the end, we opted to sell to FDS Bedford. And then in April, we signed the purchase sale agreement that we posted last quarter and FDS Bedford then submitted our building as part of a proposal. It was a extensive proposal for government procurement. And that proposal is – sorry that procurement is still ongoing and we await the outcome. And the closing of our P&S will be dependent on an award to FDS Bedford. So if we get a successful sale of the building, eventually Aware will move to nearby lease space. And we’re currently checking out options in the neighborhood. We don’t plan to move far. With the expectation that we will remain cost neutral and our operating costs of the new lease space and that term building should be roughly similar, but we of course will benefit from mitigating any significant capital expenditures that we see coming down the pipe in the – in our aging building, office building. However, there’s no guarantee that we reach closing on this P&S, because FDS Bedford still needs to win the bid. Hope that helps.
Matt Glover: Thanks, Dave. Our next question, what was subscription revenue this quarter verse 2Q 2020 and how much of that subscription revenue was the upfront recognition of annual minimums?
David Barcelo: Yes. Great question, Matt. So we are now disclosing our subscription revenue in the footnotes as NQ. So you can find the numbers there. Q3 of 2020, we had a bit over $300,000 a subscription revenue and year-to-date were at $1.1 million. And the same year ago period, where we were about a bit over $100,000 in Q2 of 2020, and for the six-month period of 2020, it was a bit under $300,000. And every quarter, we will likely have some amount of our minimum prepayment recognized, but in Q2 of 2021, we were under $50,000.
Matt Glover: Thanks, Dave. Our next question, you mentioned inorganic opportunities in the press release. Can you provide more color on the inorganic opportunities you are seeing?
Robert Eckel: Yes, Matt. I mean, the only thing I’m willing to say or talk about at this time, that we’re exploring all the options that advance us in the market. So overall, in the areas that keep us current in advance. So without getting specific, that’s the best I can say at this point.
Matt Glover: Got it. Thanks, Bob. Next question is, will the company ever consider providing long-term forward guidance?
Robert Eckel: Dave, you want to take that one?
David Barcelo: Sure. At this point in time, we’re – we don’t anticipate providing long-term guidance. Anything is possible, but yes, right now it’s not the case.
Matt Glover: Great. Thanks, Dave. At this time, this concludes our question-and-answer session. If your question wasn’t answered, please email Aware’s IR team at aware@gatewayir.com. I’d now like to turn the call back over to Bob for closing remarks.
Robert Eckel: Well, I want to thank everyone for joining us on today’s call. Also remind you that you can learn more about our strategy on the investor presentation that’s available on our website. And as always, I want to thank our employees, partners, investors for their continued support. And we look forward to updating you on our next call. And with that over to Matt.
Matt Glover: Thanks, Bob. We’d 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 second quarter 2021 earnings conference call. You may now disconnect.
