BIO-key International, Inc. (BKYI) Earnings Call Transcript & Summary

Thanks, Gary. With us on the line today are BIO-key's Chairman and CEO, Mike DePasquale, along with our CFO, Ceci Welch. Just a note before we start: this call and webcast, plus any responses we give to investor questions, contain forward-looking statements. Those carry risks and uncertainties, and actual results could end up differing materially from what we currently expect. When you hear words such as anticipate, believe, expect, or project — or anything similar — that's how you can spot a forward-looking statement. We make these statements based on our beliefs, our assumptions, and information management has available as of today, and we make them under the safe harbor protections of the Private Securities Litigation Reform Act. If you'd like a fuller picture of the risks and uncertainties that could affect future performance, take a look at the Risk Factors section in the company's annual report on Form 10-K filed with the SEC. A caution to everyone listening: don't rely too heavily on any forward-looking statement we make as of today. The company isn't obligated to revise those statements, or to disclose any revisions, to reflect circumstances or events that come up after this call. So with that, let me hand things over to Mike to get us started. Mike.

Thanks, Bill, and I appreciate everyone being here today. Once I’ve finished my comments and Ceci has walked through the financials, we’ll take questions from investors. As our press release issued today notes, 2025 brought a wide range of accomplishments that have set BIO-key up for better revenue and earnings results in 2026 and beyond. Starting with the year ahead, we currently expect Q1 2026 revenue to come in at about $2.2 million, which would be 37% higher than Q1 2025 and also a bigger improvement sequentially than what we saw in Q4 2025. We further anticipate a meaningful gain in Q1 2026 bottom-line results, surpassing every one of our fiscal 2025 quarters. While 2025 revenue fell short of what we wanted, customers and prospects are showing far more urgency and determination to act when it comes to better protecting access to mission-critical systems, especially across military and defense, financial services, and regulated industries. Two major items, together worth about $2 million, also affected how our 2025 revenue compares with 2024. The first involved a $1.5 million two-year license renewal with a foreign national bank, with most of it recognized in 2024; that produced an approximately $800,000 drop in revenue recognized from this customer during 2025 compared with 2024. Even with the timing of revenue recognition for this customer, the relationship keeps expanding nicely. Earlier this month, they signed an expanded one-year license renewal worth more than $1 million for 2026, an approximately 30% revenue increase relative to the prior contract. Our year-over-year revenue comparison was also shaped by the 2025 completion of our strategic shift to sell only BIO-key branded solutions across EMEA. As we expected, that shift is starting to help both gross margin and growth prospects as we rebuild the EMEA pipeline around BIO-key-only solutions and sales opportunities that deliver much higher net margins. Those items pushed software license revenue lower year over year, but hardware and services revenue both rose in 2025 thanks to a larger customer base and more licensed endpoints. Now to our outlook. Let me go through the main trends in enterprise authentication that underpin our confidence for 2026. The first is mounting demand for secure access to digital platforms and protection from escalating cybersecurity threats, which is fueling fast expansion in the authentication solutions market. Worldwide sales are put at $23 billion for 2025 and are forecast to hit nearly $100 billion by 2035, a compound annual growth rate of almost 16%. As cybercrime grows more sophisticated, we believe businesses and governments will increasingly adopt advanced authentication technologies, like the ones BIO-key offers, to protect sensitive information and preserve customer trust. This jump in demand for stronger authentication solutions stems from broad adoption of digital services, e-commerce, online banking, and rising use of mobile devices. Authentication solutions, including biometrics, MFA, and digital certificates, are all essential for making sure only authorized people can reach private information or systems. One important gap we address is that mainstream MFA solutions provide only device-assisted authentication. Our PortalGuard platform, meanwhile, delivers a full MFA capability featuring authentication without phones or tokens and relying on biometrics. Through Passkey:YOU, we offer hosted FIDO2 passkey authentication secured by web keys, enabling authentication without tokens, phones, or passwords, with the efficiency of biometrics. Come the close of 2026, passwordless sign-in will serve as the standard approach for workforce access at nearly every enterprise. Driving this transition is the growing exposure of passwords to phishing, reused credentials, and account takeover assaults. Over 70% are already advancing toward passwordless adoption, while roughly three-quarters of enterprises anticipate spending on passkeys or passwordless tools during this year. Growth in biometric authentication uptake should persist, especially across the most sensitive, high-value scenarios within regulated sectors including military and defense, financial services, and healthcare, where growing adoption is already evident to all of us. Additional support for the momentum we observe comes from more favorable regulatory structures across numerous, numerous overseas markets, along with rising geopolitical dangers that we all recognize. Threats powered by AI are compelling security leaders to reconsider the way access choices get made, underscoring the demand for far more resilient identity approaches in which biometrics may assume a central role, in contrast to traditional approaches that prove most exposed to attacks driven by AI. Authentication technologies are moving toward unified access covering workforce, partner, and privileged access beneath single strategic foundations. Our PortalGuard Passkey and biometric offerings deliver boundless flexibility for deployment to any segment of a company's employee base, regardless of infrastructure and job function. Phones and tokens have become unnecessary, and given 16 varieties of auth factors, a single approach no longer suits everyone. These considerable changes in the way enterprises handle authentication, centered on security, convenience, compliance, and shifting regulations, align squarely with our strengths; during 2025, we introduced our Defense and Intelligence Cybersecurity Initiative, covered in today's press release. We likewise call attention to multiple recent contract victories and the momentum visible across the defense and financial sectors, plus notable new partnerships both at home and abroad. Because that material appears in the press release, I will not restate it now, though we can definitely take up any questions about any of those topics during the Q&A portion. Regarding our ongoing commitment to R&D and development of new products, BIO-key officially rolled out the new FBI FAP 20 certified EcoID III fingerprint scanner in Q4. Among our readers, EcoID III ranks as the most sophisticated, combining encrypted device-to-host communication with liveness detection to deliver quicker, safer authentication. EcoID III mainly targets heavily regulated industries and the most sensitive Zero Trust settings, including defense and banking. We are additionally wrapping up efforts on version 7.0, the biggest update ever for our PortalGuard identity platform. That encompasses a substantial platform monetization, considerable new configurability and flexibility, and enhanced lower-cost deployment abilities; it is presently going through thorough third-party security testing, with release anticipated in the second quarter. The enhancements we've made to what we sell, together with our distinctive biometric technology, provide us with an advantage that can be maintained over time—especially, as I mentioned when talking about regulated industries, because of the tough compliance requirements they face. Our areas of focus in defense and banking, specifically, carry considerable worldwide opportunity in 2026 and afterward. At present, the bulk of what we do runs on subscriptions, and we keep relying on a model centered on partners, under which about 50% of new business in the U.S. and close to 100% of business abroad moves through a network of channel partners, among them Amazon and TD SYNNEX, ties we've established across the past few years. Now onto overhead and cost: during 2025, we managed to bring down overall SG&A spending by nearly $800,000, which is 11%, and cut total operating expenses by 7%. That effort carries on, and we feel good about what adopting AI in our processes could deliver, pushing operational efficiency, productivity, and cost reduction even further; these moves matter a great deal, alongside our expansion work, in moving the company toward the objective of hitting breakeven and profitability in 2026. Last, we achieved substantial progress in making our financial standing stronger during 2025, finishing the year holding $2.7 million in cash. That's an increase of over $2 million compared with 2024, while book value rose to $7.6 million against $3.8 million as of the close of 2024. The cash we hold now, plus cash we anticipate receiving, gives us a sturdy working capital foundation for backing our 2026 growth ambitions. This year has begun well, with momentum building across a number of important verticals. We anticipate that growth in revenue, paired with controlling expenses, will significantly push forward our aim of once again hitting our target of breakeven and profitability this year; when it comes to financial liquidity, we're positioned well to finance our growth plans. With the rising uptake we're witnessing of BIO-key's adaptable authentication solutions—passwordless, tokenless, and phoneless—we anticipate 2026 will prove a highly thrilling and fruitful year for our company as well as for our shareholders. We're stepping into the most thrilling phase in our company's history, characterized by innovation, strategic expansion, and an unyielding commitment to delivering value to our customers and our shareholders. Considerable growth and profitability are within reach, and with the proper team, technology, and partnerships now in place, we stand ready to deliver long-term shareholder value; I'll now hand the call over to Cece for a review of the financials.

Thanks, Mike. Our results came out this morning, so I'll walk through a quick overview. As Mike mentioned earlier, those factors were reflected in our numbers: total revenues for 2025 fell 12%, landing at $6.1 million, down from $6.9 million in 2024. Hardware revenues more than doubled in 2025, rising over 100% to $1.3 million, mostly driven by greater purchases of our biometric solutions. Service revenue rose 6% to $1.2 million, helped by BIO-key's expanding customer base and deployments with new customers. Looking at Q4 2025, license fee revenue dropped 26%, hardware revenue climbed 85%, and service revenues fell 10%, reflecting the factors Mike discussed along with deployment timing. Our gross margin for 2025 came in at 77.5%, versus 81.4% in 2024, mainly because of the mix of software fees, license fee revenue, and hardware revenue as a percentage of total revenues. License fee gross margins improved to 91% in 2025 from 88% in 2024, which reflects the benefit of selling branded products rather than third-party products in the EMEA region. During 2025, we cut SG&A costs by 11% through proactive cost management, including reorganizing sales personnel, reducing marketing show expenses, and lower audit fees, partly offset by higher professional fees tied to BIO-key's financing activities. We'll keep focusing on cost reduction opportunities as we move forward into 2026. Research and development engineering costs rose 4% in 2025, driven by support for the new product developments Mike discussed. As a result, operating expenses overall were down 7% in 2025. Those lower operating costs helped offset the impact of lower revenue in 2025, as BIO-key's net loss grew to $4.6 million, or $0.69 per share, from $4.3 million, or $2.09 per share, in 2024. BIO-key's Q4 2025 net loss grew to $1.7 million, or $0.19 per share, compared to $1.4 million in 2024, or $0.46 per share. Weighted average common shares outstanding, which reflect warrant exercises and other financial activities, are provided in today's press release. As of December 31, 2025, BIO-key had current assets of $4.6 million, including cash of $2.7 million, compared to the prior year-end of $1.9 million, which included $438,000 of cash. Accounts receivable rose 73% to $1.2 million at December 31, 2025, from $718,000 at the end of 2024. Our book value grew to $7.6 million at year-end 2025 from $3.8 million at the close of 2024. We plan to file the 10-K within the next week. With that, operator, let's please proceed to the question and answer session.

All right, sounds good. Morning to everyone. Hey there, Mike. I appreciate you fielding what I wanted to ask.

Morning to you as well, Jack.

Mike, you covered that quite thoroughly already. I'd just like to gain a bit more insight regarding 2025 revenue, which came in somewhat weaker than what you'd originally anticipated, though it's clearly excellent to see you aiming for a robust first quarter of 2026 with $2.2 million in revenue. That's terrific. I'm simply attempting to grasp the 2025 outcome better. Among the reasons given was that this was mostly attributable to a major contract renewal signed with a foreign retail bank during 2024, which provided a boost to 2025. Could you perhaps elaborate on that a bit more? Is this a currently active customer? Are they scheduled for an expansion or renewal during 2026? Just assist me in understanding that specific customer better.

During my remarks, Jack — by the way, good morning. During my remarks, I noted that they renewed for one year at over $1 million, which works out to roughly a 30% bump in the value of that contract; it was a two-year contract that we closed in 2024; we recognized all the revenue in 2024 for those two years. That's why, once again, in 2025, clearly it couldn't be repeated. That's what I was attempting to convey. You want a bit more color on 2025. I'd put it this way, apart from the remarks I delivered during the prepared session; we underwent a major transition in our EMEA division that lasted a bit longer than anticipated, but honestly, it's going to deliver an enormous benefit for us here as well in 2026 and moving forward, owing to two factors. First, we're selling BIO-key only solutions with and including our biometrics, which are receiving very, very strong visibility, particularly within the regulated industries, and that means banking, defense, you know, healthcare, that sort of thing. The second factor is the reason this once again took a bit longer. The deal size in EMEA is, you know, some of the deals are seven-figure, but the majority of them fall in the high hundreds of thousands of dollars. So they're bigger deals; they all go through channel partners. They're usually with larger customers. The benefits are incredible when they close. It took us a bit longer to get over the chasm in 2025, and I believe that's why we underperformed our expectations there. Most of it was timing, but we are very bullish and very encouraged about 2026, and we will take advantage of that benefit. That should get us to our goal and objective of break-even profitability and obviously being cash flow positive, this year.

All right, excellent. No, I truly value that additional detail, Mike. That genuinely clarifies things quite a bit. So, only so there's absolutely no confusion, does this appear in the press release you put out? You mentioned all of those particular agreements and notable items. Am I looking at this same customer, or is it a distinct one within the financial sector? You obtained a $1.04 million one-year license renewal with a foreign bank. Is this that same customer from 2024, or is it a different entity?

No, that's that customer.

All right, excellent. All right, I appreciate you laying that out so clearly.

Happy to help.

Mike, the first quarter deserves some attention here. It really stood out to me, I have to say. Today is essentially the final day of Q1, so it sounds like you have solid visibility into that $2.2 million figure. I want to know a few things: first, did any of the slippage from Q4 carry over into Q1? Second, can you give me a clear picture of how that revenue breaks down? Is license revenue the bulk of it? How should I frame this? And is there growth happening in each of the three segments?

The bulk will probably come from licenses, though we'll also see solid hardware revenue with really healthy margins. Our blended gross margins, as you're aware, are consistently no less than the high 70s and can reach the low 80s. Based on the mix, expect gross margin of 80% or higher across everything — hardware and software together, that's the outlook.

Great. All right, that's useful. Perhaps we could just spend a moment on a few of those bigger transactions you're observing. It sounds as though you're encountering greater urgency, like you said, from clients everywhere. You began naming one segment at a time, and then it appeared you were essentially addressing every segment you have. If you could simply point to, say, a small number of possible deals that haven't been finalized yet, but are sort of sitting in the background and being worked on, which could genuinely shift the needle — where would those be? Would you say such opportunities sit in Europe, and mainly in your defense, your military and defense area, primarily in banking, financial services, or are they truly spread across everything? Where are the biggest needle-moving opportunities that perhaps you haven't yet discussed openly?

Well, certainly, and as we've talked about previously, we've built a pretty strong niche in defense and in government at present, where adding and integrating our biometrics is gaining notable traction. I don't need to remind you about the geopolitical situation we're facing, and definitely the urgency surrounding security. Inside that, inside our niche, there's a sub-niche centered on intelligence and information. That ranks as top-priority. What we offer delivers not just the security level that's needed, but also convenience, availability, and scalability, and that matters greatly in those segments; we're seeing this business worldwide, and growth will happen worldwide. It'll be in EMEA, in Europe, and in the Middle East. We currently have a few very big opportunities in South America, where we're working alongside some very large partners, prominent partners, and the relationship we announced only a couple of weeks ago with TD SYNNEX. As you're aware, they rank among the biggest resellers and VARs; they operate globally, yet definitely here in the U.S., and they're highly focused on state, local, and federal business, and as a force multiplier they will assist us in growing our business there too. It's everywhere. I mean, we have opportunities, say, in the gambling sector, correct? To secure access to information in banking, at both large national banks and some regional banks too. In healthcare, some national ministries right down to hospitals. As you know, we've operated in that business for quite a while. We span every sector of the economy, yet definitely in the regulated space, that's where I foresee continued growth. Put it this way, if you're a defense or government contractor today, your business will flourish and expand. Every one of those contractors, never mind the government itself, must secure things at the NIST level, right? They must obtain and satisfy the compliance requirements necessary for conducting business with the government, and for us that represents a massive opportunity. That is the reason I believe our partnership with TD SYNNEX is going to flourish and become substantial here within the domestic market.

That's great. Thanks for that, Mike; that's everything from my side. Best of luck to you, and I hope we talk again before long.

Sounds good. Thanks, Jack.

Hello, guys.

Hi, Dan.

Hey. Did your costs during Q1 come in roughly level with what you saw in Q4?

Well, since we haven't put out results for that quarter yet, I'm not able to speak to specific figures on expenses and the like. Our belief, both then and now, is that revenue will land inside the guidance range we gave. For me, certainly, Q1 ought to look comparable to every other quarter. Occasionally things happen — say, if we go to a big conference and lay out money in that spot — and it might run somewhat above. At this moment we're in the process of relaunching the website, with plans to complete that early in Q2. There could be certain costs tied to it, yet apart from that, things are fairly steady.

All right. Sounds like we ought to witness a fairly substantial boost in cash flow during Q1. Is there anything you can share, or any hint you can offer, regarding what we should anticipate on the R&D expense side in 2026?

In my prepared remarks, I believe I noted that we are on the verge of rolling out one of the biggest upgrades and enhancements to our PortalGuard platform, version 7. So much of that funding has already been outlaid. As you know, our work on this has stretched across close to 18 months, perhaps 2 years. My expectation is that our R&D expenses will stay fairly flat. Significant growth isn't something I'm anticipating. We're truly hopeful, and there's a highly intensive effort underway inside the company to evaluate AI-related tools, and we've signed contracts with quite a few of them. We're evaluating the places and methods where we might apply those, not just across every area of the business, but also inside development, in order to accomplish 2 things. First, grow more efficient and more productive, yet in the end lower costs and shorten our time to market.

Understood. Is there something groundbreaking in this release, or would you call it a slight step forward — an enhancement to what you already provide that you could describe?

It matters a great deal, and we'll make that known before long. Particularly on the partner side, Dan, since a number of our bigger partners are looking for the capability to manage, to combine and switch components, and to roll things out, given that subscriptions are now the model for everything. Being able to roll out licenses, take them back when, say, a customer chooses to walk away, and then apply those licenses across different accounts and similar situations. Having multi-tenant management available to those partners is genuinely important, and that fits right into the broader picture of what we're doing here. Along with plenty of other improvements around security, bringing in mobile technologies, a wide range of additional choices and availability. Much of this is aimed at getting our partners more engaged with the dashboard and with overseeing the solution set.

Got it. Within that 30% bump you brought up regarding the $1 million foreign bank renewal, is there any particular piece you're really enthusiastic about? Or was it simply additional licenses, or what?

A few things have me enthusiastic. First off, clearly the expansion and the rise in the number of users, but beyond that, the evaluation of our more sophisticated technologies — such as one-to-many — which might substantially transform how they function and enlarge this contract's scale as we move through the current year and into the following one. That prospect has me quite enthusiastic. To me it's revolutionary, since it might rank among the biggest deployments of this kind and this nature anywhere in the world. That has us enthused. Considerable growth potential lies ahead for it too.

So is the idea that you'll be cleaning up their database in a one-to-many fashion?