Aware, Inc. (NASDAQ:AWRE) Q2 2022 Results Conference Call July 26, 2022 5:00 PM ET
Company Participants
Matt Glover – Gateway Investor Relations
Robert Eckel – President & CEO
David Traverse – Corporate Controller
Matt Glover
Good afternoon, and welcome to Aware’s Second Quarter 2022 Conference Call. Joining us today is the Company’s CEO and President, Robert Eckel; and Corporate Controller, David Traverse, filling in for our CFO, David Barcelo, who’s on vacation. Following their remarks, we’ll 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’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 there are factors that could cause actual results to differ materially from those 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. 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.
Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should not 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 Aware CEO and President, Bob Eckel. Bob?
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 ended June 30, 2022. A copy of the press release is available in the Investor Relations section of our website.
We’re glad that you could join us today for this quarterly update on Aware. On today’s call, I will discuss the progress we’re making transforming our business to a subscription-based model and share some points that demonstrate our continued execution on our long-term strategic growth plan to drive scale.
Afterwards, our Corporate Controller, David Traverse, will provide additional details on our second quarter and year-to-date financial results. David is filling in today for our CFO, Dave Barcelo, who had a prior personal commitment and unfortunately could not be with us on this call. After David’s section, I’ll then review our 2022 business drivers and outlook. Lastly, we’ll open the call for your questions.
To begin, in the second quarter, we delivered $4.2 million in top line revenue despite a challenging economic environment. We are not immune to the negative impact caused by the current macroeconomic issues that have been reported in the news. Higher inflation, increasing interest rates and supply chain shortages are headwinds for purchasing decisions. As such, some companies are reviewing investment timing for changes in their existing workflows.
Furthermore, in the financial services market specifically, two of these issues often result in fewer bank accounts being opened and fewer credit applications, which consequently slows the growth of our onboarding and authentication solutions that target mobile banking. Nevertheless, our biometrics-based solutions that address fraud prevention have seen particularly strong momentum with financial institutions in Latin America and Europe.
Aware has already secured some of the largest banks in Brazil and Mexico and three of the largest banks in Turkey. And we expect to continue adding customers in the financial services market through our partnerships with strategic resellers. As we have previously mentioned, expanding the number of strategic partnerships is one of our top priorities in 2022. These partnerships enable us to leverage our expertise and expand our sales opportunities without adding additional expense to our P&L.
Throughout the second quarter, we continue to add strategic partners that expand the global reach of our biometric-based solutions. Our focus has been on working with value-added resellers with VARs and integrated product resellers and enterprises who can drive the adoption of our subscription-based offerings, thereby setting up the base for our recurring revenue, which in Q2 represents 49% of our total revenue.
It does take time for these customers to ramp up to their integrated solution into full production. We typically see it takes anywhere from 6 to 18 months. And in the current macro environment, many customers are looking to safeguard their cash. As a result, some customer launches are being delayed until the market conditions improve.
Having a robust cash position in this current macro environment is an asset. Fortunately, we are supported by a strong balance sheet that enables us to withstand this current market volatility. Furthermore, we recently strengthened our balance sheet with the sale of our office building in Bedford, Mass for $8.9 million.
After accounting for transaction-related expenses, we received $8.6 million in net cash. This additional capital provides us with the flexibility to invest in our long-term organic growth strategy and to pursue any strategic inorganic investment opportunities that are aligned with our business expectations for our current portfolio and new SaaS-based offerings.
On a final note, we recently showcased our leading-edge authentication solutions at three major industry trade shows and the enthusiastic response from attendees gives us confidence that our product road map is on track. The use of biometrics onboarding and authentication continues to gain strength and adoption all over the world.
In summary, Aware has demonstrated resilience in the face of the negative impact of recent macroeconomic issues facing the overall economy as demonstrated by revenue year-to-date growth as compared to last year and have a strong cash position to weather the headwinds.
We are focused on growing the overall number of partnerships with VARs and integrated resellers and enterprises to accelerate customer adoption of our biometrics-based solutions and expand our recurring revenue base. We continue to execute our multipronged strategy as we enter the final phase of our transition to a platform company.
Now before discussing our focus and business drivers for the remainder of 2022, I’ll turn over the call to David to walk us through our financial results for the second quarter. David, over to you.
David Traverse
Thank you, Bob, and good afternoon to everyone on the call. Turning to our financial results for the second quarter ended June 30, 2022. Total revenue was $4.2 billion compared to $4.7 million in the first quarter of 2022 and $4.3 million in the same year ago period. Year-to-date, for the six months ended June 30, 2022, our total revenue was $8.9 million, up from $8.7 million in the same year ago period.
As Bob mentioned, the slight decrease in our second quarter revenue over the prior year period was primarily the result of supply chain delays, resulting in fewer orders from our OEM partners to whom we provide software for their biometric devices.
Looking at our operating expenses. For the second quarter of 2022, our operating expenses decreased 4% to $5.6 million from $5.8 million in Q2 of last year. The $200,000 decrease in operating expenses was due primarily to slightly lower R&D sales and marketing costs. For the six months ended June 30, 2022, our operating expenses were $11.6 million, flat compared to the prior year period.
The corresponding operating loss for the second quarter of 2022 was $1.35 million, an improvement from an operating loss of $1.54 million in the same year ago period. The year-over-year improvement in operating loss was primarily due to lower total operating expenses. Operating loss for the six months ended June 30, 2022, was $2.6 million, a 12% decrease compared to the prior year period.
For the second quarter of 2022, GAAP net loss totaled $1.3 million or $0.06 per diluted share compared to a GAAP net loss of $1.5 million or $0.07 per diluted share in the same year ago period. GAAP net loss for the six months ended June 30, 2022, totaled $2.6 million or $0.12 per diluted share compared to a GAAP net loss of $3 million or $0.14 per diluted share in the same year ago period.
Our adjusted EBITDA loss for the quarter, which we reconciled to GAAP net loss in our earnings release, totaled $800,000, which is flat compared with the same year ago period. For the six months ended June 30, 2022, adjusted EBITDA loss totaled $1.4 million compared to an adjusted EBITDA loss of $2 million in the prior year period.
Looking at our balance sheet, we had $25 million in cash and cash equivalents at the end of the quarter compared to $25.1 million at the end of the prior quarter. In the week following the close of the second quarter, we completed the sale of our office building in Bedford, Massachusetts and received $8.6 million in net cash proceeds.
In this challenging macro environment, we believe our strong cash position is an asset. We strive to maintain a robust cash position that provides us with the flexibility to resourcefully allocate capital to opportunities with high ROI potential.
Considering current valuations, we continue to actively evaluate strategic opportunities that are aligned with our long-term growth plan and product road map and would enable us to drive scale as an organization.
This completes my financial summary. Now I would like to turn the call back to Bob for additional insights on our key initiatives for the rest of 2022 and beyond. Bob?
Robert Eckel
Thanks, David. Our business model transition from a book-and-ship company to a platform company with a strong base of recurring revenue derived from software subscriptions and related maintenance continues to make steady progress. The final phase of our transformation, the launch of our cloud-based adaptive authentication platform, remains on track for the second half of 2022, and we remain focused on accelerating our growth and expanding recurring revenue of our existing portfolio.
In order to achieve this expansion in revenue, we’re focused on three objectives in the second half of 2022 and beyond. First, our partnerships with indirect resellers remain vital. We expect partner-led sales to increase our operating leverage or our current offerings as we introduce and accelerate the scalability of our SaaS platform. So we’re refocusing our emphasis around these accounts.
Second, as a result of recent macroeconomic factors, we are seeing end users stay in the proof-of-concept and pilot stages of their deployments for longer than planned or anticipated. To address this and ultimately accelerate Aware’s platform adoption, we have begun to increase our efforts around customer success.
Having a strong customer success team is crucial as we focus on driving faster adoption and move to a SaaS-based business model to drive recurring revenue, particularly because end users often like biometrics expertise. For many, biometrics is a real cultural change. It requires a mind shift.
As part of these customer success efforts, we are increasing the time we spend with our partners and customers to enable them to leverage the benefits of biometrics and specific advantages of the Aware’s biometric-based solutions.
And third, we are transitioning from a Chief Commercial Officer to a Chief Revenue Officer. As noted in last week’s 8-K filing, our Chief Commercial Officer, Rob Mungovan, will be leaving Aware on August 31. Rob has certainly made an impact over the 25 years he’s been with the organization and has helped shape Aware into the Company it is today. We cannot thank him enough for his contributions and wish him all the best in the future.
It is important to note that we’ll be anticipating incurring some onetime expenses in Q3 due to this departure. I am pleased to share that we are in the final stages of hiring a Chief Revenue Officer with a strong background in commercial SaaS and sales operations to lead Aware’s sustainable revenue-generating efforts, including business development, sales, partnership programs, account management and customer success.
By shifting from a CCO to a CRO and emphasizing strategic account management as well as leading organizational alignment to scale the business, supported by enhanced customer success initiatives, we will be even better positioned to accelerate revenue generation from our existing product lines and new SaaS offering.
These three actions, when combined with the continued execution of the final phase in our business model transformation, are what drive our confidence in our expected 2022 performance. We’re encouraged by the progress we’ve made in our transition. We still have work to do, but like many other companies, we are impacted by the current macroeconomic environment. Fortunately, we benefit from having a diversified mix of customers, resulting in a balanced revenue mix. Our product portfolio offers a broad range of biometrics-based solutions that can address the requirements of government customers as well as commercial customers.
In summary, our top priority is increasing our operating leverage from our partnerships and our efforts around customer success to facilitate faster adoption and full production of our advanced authentication solutions and drive the growth of our integrated offerings and SaaS platform.
Our robust cash position made even stronger with the proceeds from the sale of the Bedford building provides us with stability in this challenging economic environment while also giving us the flexibility to continue executing our multipronged growth strategy, including prudently investing in the highest return on investment opportunities that align with our business objectives and long-term growth plan, whether organic or inorganic.
We continue to anticipate achieving adjusted EBITDA profitability in 2023. The exact timing is still unknown and is dependent on macroeconomic conditions. We remain confident that we can continue increasing our recurring revenue base and top line growth. The team at Aware appreciates your continued support, and we look forward to what is ahead for our company and industry.
With that, we are ready to open the call for questions. Matt, please provide the appropriate instructions.
Question-and-Answer Session
A – Matt Glover
Thank you, Bob. As a reminder, you can submit a question using the built-in Ask a Question feature in the webcast player. Please hold while we populate the question.
First question is for you, David. What is the impact of the building sale to your cash position?
David Traverse
Thanks, Matt. With the $8.6 million in net cash that we received from the sale of the Bedford building, we were able to add that to our already strong cash position of $25 million as of the end of the quarter. From a tax perspective, there’s no capital gains tax on the sale and it will be — the gain from the sale of the building, net of our disposals will be included in the ordinary income or loss at the end of the year.
Matt Glover
Thanks, David. Bob, you mentioned anticipating some onetime expenses in Q3 due to the transition from a CCO to a CRO. Can you approximate those onetime costs?
Robert Eckel
Specific employment agreements are available on our latest proxy statement that were filed with the SEC in April of 2022. And specific to Rob Mungovan, a copy of the amendment to the agreement was included in the 8-K filed on July 20.
Matt Glover
Bob, another one for you. When do you anticipate hiring a new CRO?
Robert Eckel
We’ve made an offer to a candidate and the individual has accepted, and we have an expected start date in early August. And if all goes to plan, the new CRO will begin to work with Rob Mungovan to ensure a successful transition. This person comes to us with extensive experience in driving revenue in several areas such as enterprise software, SaaS and partner sales, and we’ll be holding off on sharing any further details about the incoming CRO until after an official start date, at which time we’ll issue more descriptive announcement.
Matt Glover
Thanks, Bob. You didn’t mention your expected growth rate. Are you scaling back your guidance?
Robert Eckel
Well, based on our current pipeline and visibility, we expect to grow our top line in 2022 along with our recurring revenue. However, given the continued macroeconomic headwinds that we mentioned in the prepared remarks, we don’t think it’s prudent to commit to a specific growth rate for the year because we’re not sure how much more impact these macroeconomic headwinds will have on our customers and their buying decisions.
Matt Glover
Why has your patent count decreased?
Robert Eckel
Between 2020 and 2022, the patent count was reduced to remove unnecessary jurisdictions and/or deviations while maintaining one or more U.S. patents within each affected patent family. And the optimization of our patent portfolio has reduced our maintenance cost by 2/3 from approximately $360,000 yearly to approximately $90,000 per year with no sacrifician in any value.
And furthermore, our introduction of multiple trade secrets into our IP portfolio and process refines the process by which we guard those trace sequences. So we positioned us for better protection without any getting cost. And then we continue to grow our bank of trade sequence and also new patent applications when critical and breakthrough technology is fully aligned with the future of the business.
Matt Glover
Thanks Bob. Next question. How confident are you in your ability to be cash breakeven on an operating basis by the end of next year? Does the macro environment push this out into 2024?
Robert Eckel
We’re managing the macro environment the best we can. We still anticipate we’ll cross over to adjusted EBITDA profitability by the end of 2023. And again, I’ll reiterate, although the exact timing is unknown at this point.
Matt Glover
Bob, next question. Any color you can add on your capital allocation plan?
Robert Eckel
All I can say is that we’re fortunate to have a strong cash position that enables us to invest in the highest return on investment opportunities that are aligned with our product road map and our long-term growth plan. And it doesn’t matter if those are organic or inorganic, we’re looking at both. And I don’t plan on getting into specifics prior to our general market announcements in this area.
Matt Glover
Thanks Bob. Next question is for you, David. Did Aware make any share repurchases in the second quarter?
David Traverse
Yes. So we did purchase a nominal number of shares, and we’ll continue to repurchase shares in line with the approved share repurchase program that has been set.
Matt Glover
Thank you. Why was Rob Mungovan terminated?
Robert Eckel
Well, as I stated earlier, we’re realigning the organization to shift from a CCO to a CRO. It has resulted in the elimination of the Chief Commercial Officer position. And then with this realignment, we’ll be emphasizing strategic account management, supported by enhanced customer service and customer success initiatives, putting us in a better position to grow revenue from the existing product lines and the new SaaS offering. And as I stated earlier, Rob certainly made an impact over 25 years, and we can’t thank him enough for what he’s done.
Matt Glover
Thanks Bob. Has current macro changed your hiring plans or sales strategy?
Robert Eckel
The current macro environment has not changed our hiring or sales strategy. As mentioned in our prepared remarks, we’ve strengthened our focus on customer success through strategic hires and internal reallocation of resources, so we can guide our customers into full production and get them into their adoption. We remain well positioned to implement any personnel changes that we need to do and identify them. And we anticipate the incoming CRO will have input into both hiring and sales strategies, and we’re prepared to work with them on it.
Matt Glover
Thanks, Bob. Next one is regarding our SaaS offering. How many customers are trialing? When can the SaaS offering be a meaningful contributor?
Robert Eckel
Well, right now, we currently have a dozen or so select customers that are trialing the SaaS platform, and they’re providing us some great feedback, and we’re adding more as we speak. That trial has been going on for a couple of quarters now with more coming on. Their constructive feedback has been overwhelmingly positive and very helpful in our quality assurance process so we can assure an optimal user experience as well as the basic needed baseline functions. And we’re on track for our SaaS offering in the second half of the year relative to general availability, and we believe it will be — meaningfully contribute to our revenue in FY 2023.
Matt Glover
Dave, the next one is for you. What was subscription revenue?
David Traverse
So year-to-date, the subscription revenue has been $1.7 million, and that compares to $1.1 million last year.
Matt Glover
Bob, next question for you. Have you seen deal activity slow because of the macro?
Robert Eckel
As I mentioned before, we are definitely seeing some impact of the closure of some deals due to the macroeconomic situation.
But in generally, commercial applications, some companies evaluate the timing of their investment decisions and commercial budgets as we know can be more discretionary. In contrast, on the government side, the budgets are more in line with the longer-term plans that are in place and decisions must be executed on.
So regardless of the environment, yes, we are seeing some deal activity slow. However, we have a diversified customer mix, and it’s allowing us to maintain and increase revenue, including recurring revenue as a percentage of the overall year-to-date as compared to last year.
Matt Glover
Thanks Bob. At this time, this concludes our question-and-answer session. If your question wasn’t answered, please e-mail Aware’s IR team at awre@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 today on this call. I’d also like to remind you all about the investment presentation that’s available on our website. And if you haven’t already downloaded it, I invite you to do so, learn more about our overall strategy.
And as always, I’d like to thank our employees, partners and investors once again for their continued support, and we look forward to updating you on our next call.
Over to you, Matt.
Matt Glover
Thanks Bob. A recording of today’s call will be available for replay via a link in the Investor Relations section of the Company’s website. Thank you for joining us today for Aware’s second quarter 2022 earnings conference call. You may now disconnect.
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