AWRE - NASDAQ

Good afternoon. And welcome to Aware's Fourth Quarter and Full Year 2024 Conference Call. Joining us today are the company's CEO and President, Ajay Amlani; and CFO, David Traverse. [Operator Instructions] 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 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, but Aware undertakes no commitment to update or revise the forward-looking statements, whether because of new information, future events or otherwise, except as required by applicable securities laws. Additionally, during this call, we will discuss certain non-GAAP financial measures as the 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'd like to remind everyone that the 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's CEO and President, Ajay Amlani. Ajay?

Thank you, Matt and good afternoon, everyone. First, I want to express my deep gratitude to the board for their trust and support. I also want to thank the entire Aware team. You've welcomed me warmly over the past 30 days and it already feels like home. Aware is built on a foundation of exceptional talent and I am honored to lead us into this next chapter. Today, I want to share why I joined Aware, the vast market opportunity ahead and the strategic priorities that will drive our success in 2026 and beyond. While I may be new to this role, I'm not new to this mission. My career has been dedicated to solving the very challenges that Aware is uniquely positioned to address. The critical need for secure, seamless identity verification in a rapidly evolving digital world. For nearly two decades I've worked at the intersection of government, private sector innovation and identity technology, helping shape how people verify and protect their identities across both physical and digital environments. My passion for biometric security began in the wake of September 11th. Watching those events unfold, I made a personal commitment to contribute to national security. That journey led me to the founding team at the Department of Homeland Security where I played a role in shaping its early operations. Our focus was on building a robust security infrastructure to prevent future attacks. Through that work I saw firsthand the power of biometrics, not just as a security tool but as a means to make identity verification more efficient and less intrusive. That realization inspired me to co-found the company that became CLEAR, which now serves over 12 million members and enables frictionless identity verification at airports and beyond. Since then I've continued working on the front lines of identity security, helping the Department of Defense advance cutting-edge biometric technologies, pioneering government-issued digital IDs, and leading strategic initiatives in both the public and private sectors. Today, we are at a pivotal moment. The rapid rise of AI-driven fraud, from deepfakes to bot-driven impersonation, is making trusted innovative biometric solutions more critical than ever. Governments, enterprises, and consumers all recognize that traditional authentication methods are no longer enough. This is where Aware stands apart. Since my time at DHS, I've recognized the critical role Aware technology plays in national security. In fact, the utilization of Aware technology has been instrumental in preventing any major terrorist attack since September 11. Few companies can claim such a profound impact on global safety. Aware has long been one of the most trusted names in biometrics, with the expertise, technology, and reputation to lead in this space. However, to fully realize our potential, we need greater coordination, sharper focus, and stronger execution, areas where I am committed to driving meaningful progress to capitalize on the immense opportunities ahead. We are already taking decisive action. The biometrics industry operates in long cycles, and while macroeconomic headwinds and government budget constraints continue to pose new challenges, we are sharpening our go-to-market strategy to improve efficiency and unlock new revenue opportunities. While our recurring revenue provides stability, we acknowledge expected near-term revenue fluctuation as we refine our strategy and adapt to industry dynamics. 2025 is a turning point, one of action and accountability. The steps we are taking now are essential to strengthening our foundation, improving efficiency, and positioning Aware for sustainable growth. I firmly believe that we have the right technology, talent, and strategic vision to emerge stronger. We are focused on laying the groundwork for meaningful revenue growth. That means forging high-impact partnerships, enhancing sales efficiency, and accelerating commercialization of our most differentiated technologies. To capitalize on the growing demand for biometric security, we will focus on three key priorities. First, deepening strategic partnerships. Aware has long-standing relationships with government agencies and commercial enterprises. We will strengthen and expand these partnerships, aligning with major players in identity industry, and to drive broader adoption and scale. Our goal is to be an essential partner in the biometric ecosystem. Second, advancing technological innovation. Our solutions must be best-in-class for security, ease of integration, and system-agnostic flexibility. By enhancing our core technologies, we will cement Aware's position as a leader in biometric authentication. Third, scaling thoughtfully and sustainably. To drive sustainable revenue growth, we are taking immediate steps to refine our go-to-market strategy, including targeted sales initiatives, optimized pricing, and enhanced leadership in key areas. Additionally, we are strengthening our customer success teams to maximize renewals and deepen engagement with existing customers. With a strong balance sheet and a solid foundation, we have the financial flexibility to make targeted disciplined investments in our strategic priorities. While we anticipate revenue headwinds throughout 2025 as we sharpen our go-to-market strategy, our focus remains on improving operational efficiency and laying the groundwork for sustainable growth beginning in 2026. As both CEO and a shareholder, I am honored to lead Aware into its next chapter. The road ahead requires focus and discipline, but I have no doubt our best days are ahead. With that, I'll hand it over to David for a closer look at our fourth quarter and full year financial results. Over to you, David.

Thank you, Ajay. We're thrilled to have you on board and appreciate your energy and leadership as we drive the company forward. Let's dive into our results for the fourth quarter and full year, which ended on December 31st, 2024. Starting with the fourth quarter, total revenue increased by 10% to $4.8 million, compared to $4.4 million in Q4 of last year. This increase was largely driven by higher software license revenue, which includes the impact of a $1 million one-time license sale to a European government. Recurring revenue was $3.3 million, compared to $3.7 million in the prior year period. A slight year-over-year decline is primarily due to timing of revenue recognition for contracts, which can fluctuate from quarter-to-quarter, as we mentioned previously. Operating expenses were reduced to $6.3 million, down 29% from $8.9 million in Q4 of 2023. Operating loss improved $1.5 million, compared to an operating loss of $4.5 million in the same period of last year. And GAAP net loss was $1.2 million, or $0.06 per diluted share, compared to a GAAP loss of $4.2 million, or $0.20 per diluted share in Q4 of 2023. Please note that 2024 included severance and acceleration of stock-based compensation expense of $600,000, related to the termination of our CEO in December 2024. And 2023 was impacted by a $2.7 million one-time expense, related to a write-down of our note receivable from our 2022 investment in Omlis Limited. Our adjusted EBITDA loss for the fourth quarter, which would reconcile the GAAP earnings and our earnings release, was $800,000, compared to an adjusted EBITDA loss of $1.2 million in the prior year. Now for the full year. Total revenue was $17.4 million, compared to $18.2 million in the same period last year. This was due to lower software license revenue. Recurring revenue grew 9% to $12 million, which made up 69% of total revenue. This growth underscores a continued focus on establishing stable, predictable recurring revenue streams. Operating expenses decreased by 14%, or $3.9 million to $22.9 million, compared to $26.8 million in the prior year. Operating loss for the period improved to $5.5 million, compared to $8.5 million in 2023. And net loss totaled $4.4 million, or $0.21 per diluted share, compared to a net loss of $7.3 million, or $0.35 per diluted share in the year-ago period. Please note that 2024 included severance and acceleration of stock-based compensation expense of $600,000, related to the termination of the CEO in December 2024. And 2023 was impacted by a $2.7 million one-time expense related to a write-down of our note receivable from our 2022 investment, Omnibus Limited. And 2023 was also impacted by $800,000 one-time gain related to our adjustment to the fair value of the contingent acquisition payment from our 2021 acquisition of FortressID. Adjusted EBITDA loss for the year was $3.9 million, compared to $4.6 million in the prior year. This improvement was primarily due to low operating expenses, partially offset by lower revenue. Now turning to the balance sheet. As of December 31st, 2024, we had cash, cash equivalents, and marketable securities totaling $27.8 million, compared to $30.9 million at the end of 2023. Looking ahead, as we navigate the anticipated challenges of 2025, we remain steadfast in our strategic initiatives and are optimistic about driving growth in the future. Ajay, back over to you.

Thanks, David. As we move through 2025, our priority remains laying the groundwork for long-term growth while navigating near-term financial headwinds and uncertainty with discipline and precision. Aware has a strong legacy of innovation in biometric authentication, and we are committed to strengthening our position as a trusted partner for governments and enterprises worldwide. While external factors pose challenges, we are focused on controlling what we can, sharpening our go-to-market strategy, deepening key partnerships, and accelerating technological advancements to position Aware for a return to growth. I look forward to working closely with our team, customers, and stakeholders to shape the future of digital identity security. I also look forward to providing further updates on our progress and execution during our Q1 call in May. That concludes our prepared remarks. We'll now open the call for questions. Matt, please provide the instructions.

[Operator Instructions]

Thank you, Ajay. Our first question, AJ, you discussed refining the sales strategy. What changes are being implemented to improve sales efficiency?

We are taking a more focused and strategic approach to sales, aligning our efforts with the areas where Aware's biometric solutions can drive the most impact. This includes refining our go-to-market strategy by prioritizing high-value customers in sectors where a secure, seamless identity verification is mission critical. We are also optimizing our pricing model to enhance competitiveness and drive greater adoption. Additionally, we're strengthening our sales leadership and customer success teams to improve engagement, conversion rates, and long-term retention. Customer and partner relationships remain central to our strategy. We are deepening existing partnerships with flagship government agencies in the U.S. and abroad, while actively pursuing new collaborations with customers, systems integrators, and technology providers to expand our reach and scale more efficiently in both domestic and international markets. These steps are essential in positioning Aware for sustainable growth.

Thanks, Ajay. Why do you believe now is a good time for Aware to initiate a more effective go-to-market strategy?

When I worked with the original team at the Department of Homeland Security to solve some of the various challenges and issues regarding identity, I learned that there are three core factors of verifying identity. What you know, what you carry, and who you are. What you know is all about usernames and passwords, phone numbers and home addresses, social securities numbers, and other information that only you should know. That information has now become searchable and is easily found on the dark web by crime as a service fraudsters. What you carry, the second factor, has also struggled to become a core factor, as it's proven to be a challenge to take a physical driver's license or a passport and move it from the physical world into a digital one. There are a number of companies that have received significant amounts of investment trying to solve this problem, and their solutions so far have not met the needs of consumers or of businesses. It is proven to be challenging to stick an identification document into a phone, although many are currently trying. Fortunately, the third factor, who you are, otherwise known as biometrics, has become an easier one for the market to use. Historically, it has always been an expensive endeavor to deploy biometric devices into physical locations. The consumers have also been skeptical of biometrics, dating back to lingering concerns and perceptions from sci-fi movies such as Minority Report. Now consumers carry mobile biometric devices in their pockets everywhere they go, and they also prefer using biometrics offered by these device manufacturers over constantly changing passwords and PIN codes. They are now even being asked to prove that they're human with the use of things called captchas, which are slanted letters that are very difficult to read or puzzles that are actually very difficult to solve unless you are actually an AI-trained robot. So, this time is a wonderful time to be in the biometrics industry. Many customers are investing more amounts into the biometric industry, and they are making sure that their consumers' answers or consumers' questions are being answered in terms of the needs that they have and the desires that they have to move to biometrics over other identification mechanisms.

Thanks, Ajay. Our next question is for David. What drove the reduction in operating expenses for the year?

Thanks Matt. So, the 7% decrease in operating expenses, which is when you factor in EBITDA expenses adjustments, it really reflected the disciplined approach that we took last year to cost optimization and including streamlining operations and reducing discretionary spending. And the goal of that was it allowed us to maintain that financial flexibility, which will enable us to invest in long-term growth drivers that we've been talking about.

David, our next question. Aware works closely with U.S. federal agencies. Do you expect the recent DOGE activity to impact the business?

U.S. federal government remains a key customer for Aware. They are the single largest spender on cybersecurity and biometric technology globally. We recognize the evolving challenges impacting various agencies. While it is too early to assess the full impact of DOGE-related changes, we are monitoring potential shifts in procurement patterns in agency budgets. One of the elements of biometric technology is that it does drive increased efficiency. So, as biometrics are being utilized to be able to allow services to be offered to citizens, of the United States, more effectively and more cost-efficiently, these technologies are ways to be able to allow the federal government to save money. Our longstanding relationships and mission-critical solutions position us well to navigate any changes.

Thanks, Ajay. David, total revenue for the fourth quarter increased year-over-year, but declined for the full year. Can you walk through that?

Yes, I can do that. I'll talk about the fourth quarter first. So, the increase in revenue for the fourth quarter, that was driven by the $1 million license contract that we secured with the European government in October. And for the full year, while we were able to grow recurring revenue, total revenue declined, and that was due to the license sales that can fluctuate from period to period based on the buying cycles of government agencies. Looking ahead, as Ajay mentioned earlier, we do anticipate some near-term revenue challenges, largely due to the variability in non-recurring revenue, and as we implement our more strategic and focused approach. So, please keep in mind that the timing of larger deals and project-based revenue can fluctuate from quarter-to-quarter, impacting short-term results.

Thanks, David. Another one for you. You previously guided the double-digit recurring revenue growth in 2024. How did that trend?

Yes, so annual recurring revenue for the year did increase 9% year-over-year, which, while we missed our goal for the year, we are pleased that it helped expand our recurring revenue foundation, and it will continue to be a focus of us moving forward. And now, especially with the new leadership in place, we're taking the necessary steps to drive stronger, more consistent growth, and remain committed to building a stronger foundation for that long-term sustainable growth.

Another one for you, David. With a robust balance sheet, are you looking to implement M&A as a potential component of your growth strategy?

Yes, so as we've talked about the last few quarters, our primary focus remains on driving organic growth, but we always continue to evaluate any strategic acquisition opportunities that could accelerate our technology roadmap or expand our market reach. And that being said, with new leadership in place, our near-term priority is on execution, strengthening our go-to-market strategy, and improving sales performance, as well as driving operational efficiencies. Any M&A activity, we will consider it carefully and only be pursued if it clearly enhances our long-term shareholder value.

Ajay, you mentioned on the call being a shareholder. How many shares do you own?

Before I joined Aware, I purchased just under 1% of the company, which equates to about 205,000 shares. I firmly believe in Aware's long-term potential and the strategy we are executing to drive sustainable growth. My personal investment reflects the confidence I have in our technology team and other opportunities ahead. I'm fully aligned with our investors in creating long-term value, and I wouldn't ask others to believe in Aware's future if I wasn't willing to invest in it myself.

Thanks, Ajay. At this time, this concludes our question-and-answer session. If your question wasn't answered, please email Aware's IR team at [email protected]. I'd now like to turn the call back over to Ajay for closing remarks.

Thank you all for joining us today and for the continued support of our employees, partners, and shareholders. We look forward to updating you further on Aware's progress during our next webcast. Now I'll hand it over to Matt.