Aware, Inc. (AWRE) Earnings Call Transcript

Good afternoon, and welcome to Aware's Third Quarter FY '26 Conference Call. Joining us today are the company's CEO and President, A.J. Amlani; and CFO, David Traverse. Following their remarks, we will open the call to questions [Operator Instructions] Before we begin today's call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on current expectations and assumptions of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied. 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, which will be available in the Investor Relations section of the company's website. Aware wishes to caution you that information regarding important factors that could cause actual results to differ materially is contained in forward-looking statements and Risk Factors section of today's earnings release and in the company's SEC filings, including its most recent annual report on Form 10-K and subsequent 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 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 in the most directly comparable GAAP measures in the company's earnings release issued today available in the Investor Relations section of the company's website. 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 would like to turn the call over to Aware's CEO and President, A.J. Amlani. A.J.?

Thank you, Delaney, and good afternoon, everyone. Revenue for the third quarter was $4.4 million compared with $5.1 million in the prior year period. While revenue was down year-over-year and that is not where we want it to be, there were several meaningful developments this quarter that gave us confidence in the direction of the business. We saw a stronger contribution from recurring revenue, continued to realize the benefit of the cost reductions implemented earlier this year, expanded activity with existing customers, increased pipeline engagement with U.S. federal government customers, and we reached an important milestone in our government strategy with a new government agency customer. The quarter reinforces the importance of the work we are doing to sharpen our focus, align our resources and build a more scalable business around the areas where we believe Aware can be most competitive. Let me start there. During the quarter, Aware was selected by a government agency customer to deploy intelligent liveness capabilities from the Awareness Platform. This is important for us for several reasons. First, it moves the Awareness Platform from the broader government opportunity pipeline into an active government agency selected deployment opportunity. Since funding for most of the Department of Homeland Security was restored on April 30, we have seen increased solicitation activity for the biometric identity programs we pursue as agencies look to allocate funding to improve national security, modernize legacy biometric and identity systems and improve user experiences. Second, it gives us an opportunity to demonstrate how capabilities such as biometric orchestration and intelligent liveness can support high assurance identity environments. And third, it represents progress against the government strategy we have discussed over the past several quarters, which has already generated additional government opportunities in recent months. Federal and national security procurement cycles remain difficult to predict, and we do not expect progress in this market to occur in a straight line, but converting engagement into an active customer is an important step. We have spent much of the last year positioning Aware to compete more effectively for these types of programs. That includes continued investment in independent testing, certifications, government evaluations, interoperability, product and other requirements that can help reduce barriers to adoption in mission-critical environments. These activities do not always produce immediate revenue, but they matter because government customers need confidence not only in the technology itself, but also in its performance, security, interoperability and readiness for deployment. We also continued to expand within our existing customer base. Our long-standing customer relationships across the U.S., U.K., Canada, Germany, Brazil, Turkey and other countries gives us a strong foundation to grow from. As we modernize our technology, we are upselling existing customers to additional capabilities and cross-selling the Awareness Platform, including liveness, matching and orchestration into accounts that have historically relied on individual Aware products. We believe this expansion within our core base of flagship customers is an important driver of future revenue growth. Aware also continued to expand its commercial business. Including a new relationship with Adobe Acrobat Sign's distributor, delivering biometric security for customers using Adobe Acrobat Sign with a new customer activity in Latin America and an additional customer interest from both North and South America. With the modernized Awareness Platform, we are seeing increased interest from commercial customers who want to be in control of their own biometric solutions rather than being locked into existing providers. Expansion within established customer relationships is an important part of the model we are building. It reflects both the durability of our technology and our ability to support customers as their identity requirements expand into new products, geographies and use cases. That expansion is showing up in our recurring revenue. Recurring revenue grew 11% to $4 million compared with $3.6 million in the third quarter of last year and represented more than 90% of total revenue for the quarter. That said, because part of our recurring revenue comes from on-premises term license and the timing of those renewals can cause quarterly fluctuations. That is the type of business we are building around the Awareness Platform. Recurring revenue can still vary from quarter-to-quarter, broadening that base through new customers such as this quarter's government agency win and a new channel partner of Adobe Acrobat Sign is a priority for us. Over time, increasing the recurring component of our business should help us improve visibility and create a more consistent revenue foundation. We also continue to make progress on the cost side of the business. Earlier this year, we said we were taking approximately $4 million of annualized costs out of the business. Those actions are now increasingly visible in our operating results. Our operating loss for the quarter narrowed to $0.9 million compared to $1.3 million in the third quarter of last year. We recognize that reducing expenses alone is not the objective. Ultimately, we need to pair a more efficient cost structure with stronger and more consistent revenue performance. Establishing the appropriate operating base gives us more flexibility to invest selectively in the products, customers and markets where we believe Aware has the strongest opportunity to create value. Our strategy remains focused on the Awareness Platform and its biometric orchestration capabilities, helping organizations more easily deploy, manage and modernize biometric identity systems. That includes capabilities such as liveness detection and biometric matching as well as the ability to incorporate technologies from other providers through a common orchestration and decisioning layer. The goal is not simply to sell customers another point solution. It is to give them greater control over an increasingly complex identity technology environment. We continue to believe that need is becoming more important as AI changes both the threat landscape and the pace at which organizations need to adapt their defenses. Deep fakes, synthetic identities, injection attacks and other forms of AI-enabled fraud make it increasingly difficult to rely on a static identity architecture or a single technology indefinitely. This is where the combination of true biometric and workflow orchestration with liveness, matching and flexible decisioning becomes increasingly relevant. Looking ahead, we remain focused on execution rather than declaring that the transformation from a product and components business to a platform business is complete, a typical seasonal pattern of growth with a generally similar mix of recurring and nonrecurring revenue to what we saw in the third quarter while continuing to maintain the lower cost structure established this year. More broadly, the actions we have taken throughout 2026 are intended to put us in a better position entering 2027, a more focused platform approach, a lower operating cost base greater emphasis on recurring revenue, ongoing engagement in the commercial, federal and national security markets and a platform designed to support a broader set of customer identity requirements. With that, I will turn the call over to David to review our financial results in more detail. Over to you, David.

Thank you, A.J. Now let's review our financial results for the third quarter ended September 30, 2026. Revenue for the quarter was $4.4 million compared to $5.1 million in the prior year period. Recurring revenue was $4 million compared to $3.6 million in the third quarter of 2025. The year-over-year decrease in total revenue was driven primarily by lower perpetual license sales, while the increase in recurring revenue was driven primarily by on-premise term licenses. Because a significant portion of term license is recognized upfront when the license is delivered, the timing of these term license sales and renewals can have an outsized effect on any single quarter. Operating expenses for the quarter was $5.4 million compared to $6.4 million in the prior year period. The year-over-year change reflects the spending reductions we implemented earlier this year. As we said on our Q1 call, those actions were intended to reduce our operating expenses by approximately $4 million on an annualized basis, and Q3 reflects the first full quarter of those savings. Operating loss for the quarter was $900,000 compared with an operating loss of $1.3 million in the third quarter of 2025. Net loss for the quarter was $800,000 or $0.04 per diluted share compared to $1.1 million or $0.05 per diluted share in the prior year period. Adjusted EBITDA loss was $500,000 compared to $800,000 in the prior year period. Now turning to our results for the 9 months ended September 30, 2026. Total revenue was $11.1 million compared to $12.6 million in the prior year period. Recurring revenue was $9.6 million compared to $9.2 million in the prior year period. The year-over-year decrease in total revenue was driven primarily by lower perpetual license sales, while the increase in recurring revenue was primarily driven by on-premise term licenses. Operating expenses were $18.4 million compared to $17.7 million in the prior year period. As a reminder, the year-over-year increase in our year-to-date expenses reflects onetime severance costs of $700,000 recognized primarily in the first quarter as well as higher compensation costs related to hires we made in 2025. As we noted on our Q1 call, we reduced operating expenses by $4 million on an annualized basis beginning in Q2 2026, and the underlying expense trend reflects those actions. Net loss for the 9-month period was $6.8 million or $0.31 per diluted share compared to $4.4 million or $0.21 per diluted share in the prior year period. Adjusted EBITDA loss was $6.1 million compared to $3.8 million in the prior year period. We ended the quarter with $15.4 million in cash, cash equivalents and marketable securities, and we have no debt. Our balance sheet continues to provide us with flexibility. And we remain focused on a disciplined capital allocation. The objective of the cost actions we implemented this year was to better align our spending with the size of our business while preserving investment in the areas we believe are most important to the future growth, which is primarily the Awareness Platform. We also expect fourth quarter operating expenses to remain generally consistent with the lower cost structure we established following the actions taken earlier this year. We will continue to make adjustments to our operating expenses as appropriate. Quarterly variability remains a characteristic of our business. Revenue can move between periods based on the timing of licenses, renewals, procurement cycles, customer deployments and services activities. Our financial priorities remain straightforward: drive revenue growth, maintain expense discipline, preserve balance sheet flexibility and direct our resources to the platform and markets where we believe Aware can generate the strongest returns. With that, I'll hand it back over to A.J. for closing remarks. A.J.?

Thanks, David. As we close, I want to reinforce where we stand. We are pleased with the progress we made during Q3, particularly in the new government agency customer win, establishment of a new important commercial customer relationship, improvement in recurring revenue and the impact of the cost actions we implemented earlier this year. At the same time, we are not satisfied with simply pointing to signs of progress. Our revenue performance still needs to improve, and our responsibility is to turn the opportunities in front of us into more consistent financial results. That is what we are focused on as we finish 2026 and enter 2027. We have a more focused cost structure than we did at the beginning of the year. We have increasingly concentrated our strategy around the Awareness Platform and the liveness matching and orchestration capabilities it provides. And we are beginning to see tangible progress in markets such as national security, where we have invested considerable time positioning the company to compete. The next steps are continuing to strengthen the Awareness Platform and focusing on execution. We need to expand the customers we already have, convert the opportunities we are pursuing, continue increasing the quality and durability of our revenue and remain disciplined about where we invest. We believe the actions taken during 2026 have created a better foundation for that to work. That concludes our prepared remarks. We will now open the call for questions. Delaney, please provide the instructions.

First question comes from John Phillips. Management previously noted that federal procurement activity returned to normal starting in May 2026. Now that we are in October, did clear DHS backlog flow into Q3 revenue as expected or are federal sales cycles still experiencing friction? Furthermore, is Aware actively bidding as a prime or subcontractor on the upcoming $100 million-plus USCIS Immigration Biometrics and Identity Services, IBIS contract dropping this month?

Thank you, John, for your question. Yes, this is a really important question. And obviously, the Department of Homeland Security shutdown time, the record shutdown length was difficult for us, but it was obviously much more difficult for all the public servants to be able to get through. Now that DHS has reopened, we've seen a record number of procurements come out. It's coming out much faster. The time lines for being able to award are much smaller. We're seeing that the backlog is not getting cleared necessarily yet. There's still a significant amount still coming through. And that federal activity did improve after operations normalized, but there's still quite a few additional procurements continuing to come out over the course of the next year to 1.5 years. We don't comment on specifics with regards to the contracts of whether or not we're bidding on specific active federal procurement or whether or not we're bidding as a prime or a subcontractor as our teaming strategy is kept confidential typically until an award is made. But as mentioned, DHS agencies are looking to modernize legacy biometric systems. USCIS is certainly one such agency. And as you mentioned, the combined IBIS project will provide scalable and secure IT services supporting data analytics, machine learning, biometrics and identity management. And that's all consistent with the significant amount of work happening across DHS and other agencies as well. As you know, federal and national security identity modernization remains an important focus for us. We're actively engaging with customers and partners around opportunities where our orchestration liveness and matching capabilities are relevant, and we'll disclose material wins when appropriate. Thank you so much for your question.

A.J. Next question also comes from John Phillips. We absorbed roughly $700,000 in onetime restructuring charges in Q2 to achieve $4 million in annualized cost savings. Can you quantify exactly how much of that run rate cost relief was realized on the bottom line during Q3? And when do you expect the company to achieve a sustained net income breakeven baseline under this new cost structure?

All right. Thanks for the question. We did achieve the $4 million in annualized savings in Q3, which you can see in our operating expenses that declined from $5.4 million this quarter compared to $6.4 million last year. As far as breakeven, we're not giving a time line on that, but we do expect to maintain the lower cost structure and we will continue to make adjustments for operating expenses as appropriate.

Thank you, David. Next question also from John Phillips. As you migrate the business to the cloud-based Awareness Platform, can you provide an update on your annual recurring revenue growth for Q3? Specifically, what percentage of the Q3 sequential improvement was driven by high-margin recurring SaaS subscription versus traditional model perpetual licenses? This one also goes to you, David.

Yes. No, thanks again for the question. Recurring revenue did grow in the quarter from $4 million to $3.6 million compared to last quarter. As we've talked about, the Awareness Platform is a strategic and important part of the evolution of the company as we transform Aware from a product and components business into a platform business. And -- but we've got to be clear, that won't happen in a single quarter. Many customers still require self-hosted deployments. And while we expect that shift toward our cloud over time, our focus is on growing recurring revenue whether customers host it themselves or we host it for them. And we want to be very clear that recurring revenue can still vary from quarter-to-quarter. So we encourage investors to look at the trend over multiple quarters as we build a more durable recurring revenue foundation.