BIO-key International, Inc. (BKYI) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to BIO-key First Quarter 2018 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operation Instructions] Please note today's event is being recorded. And now I would like to turn the conference over Scott Mahnken, Vice President of Marketing. Please go ahead, sir.

Good morning and thank you for joining us on today's call. With me this morning are Mike DePasquale, BIO-key's Chairman and CEO; Barbara Rivera, BIO-key's Chief Operating Officer; and Ceci Welch, BIO-key's Chief Financial Officer. I'd like to remind everyone that today's conference call and webcast may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. The words estimate, projects, intends, expects, anticipates, believes, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are made based on management's beliefs as well as assumptions made by and information currently available to management, pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete description of these and other risk factors that may affect the future performance of BIO-key International, see Risk Factors in the Company's Annual Report on Form 10-K and its other filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company also undertakes no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made. At this time, I'd like to turn the call over to Mike DePasquale. Mike?

Thank you, Scott. Good morning, everyone and thank you for joining us today. I want to take some time today to review some of our recent engagements as well as our strategic vision. As we reiterated in the past, the nature for our business depends on the timing of larger software and hardware agreements, creating variability in year-over-year and sequential quarterly comparisons as we saw in this past quarter. We continue to focus investors on our progress on an annual basis and therefore provides guidance for the year as a whole, and we remain confident that our prospects for 2018 and we currently expect greater strength in the second half of the year, given sales cycles and customer preference over the past two years and completing agreements most of those come closer to the end of the year. Much of our effort during the quarter was in developing our pipeline of future revenue opportunities across the business, including direct sales initiatives with larger prospects, as well as advancing opportunities with partners expanding our distribution relationships, any particular focus on leveraging our presence relationships and capabilities in Asia. Domestically, we continue to see increasing enterprise engagement in the security convenience, reporting and liability mitigation benefits of our biometric solutions, all of which support our positive outlook and full-year guidance. Let me turn to some specific agreements announced in the first quarter. One was the integration of our ID Director software from Microsoft Windows for a regional community bank across the Southeast and the Midwest for hundreds of its full-time and part-time employees. The organization is now able to seamlessly incorporate a unique biometric authentication method, which cannot be lost or stolen or shared thereby directly solving network and security vulnerabilities encourage utilizing password authentication in a shared workstations environment. In another case, we helped a Midwest-based manufacturer secured its factory and administrative employee network access by implementing our ID Director for Windows to add a layer of biometric authentication for employees seeking to access the Company's network. For an industrial engineering and manufacturing firm, we deployed our hardware EcoID fingerprint readers and our software ID Director for windows to secure employee access. This implementation was intended to address a security breach the firm had encountered which was a direct consequence of employee password sharing. Fortunately, this organization was able to recognize its vulnerability after reviewing their authentication process and move quickly to integrate biometric authentication to be able to ensure they know who is trying to access their network at any given moment. We've also closed the contract with the prestigious government defense ministry that will incorporate our WEB-key platform into their authentication solution. Along with the initial order, we will be collaborating on an advanced solution for Microsoft Active Directory Federation Services or ADFS, which allows for single sign-on to enterprise applications across different boundaries. We will be marketing that solution later this year. These are just a few examples that validate the security efficiency and ease of use to BIO-key solutions as well as growing enterprise recognition of the cost-effective solutions that biometrics can deliver. As we mentioned on our Q4 call, our strategy to grow revenue from our software license solutions is focused on leveraging partnerships with OEMs and large software application providers, who incorporate our technology into their customers' solutions. Traditionally, highly regulated industries have presented the largest market opportunity for our solutions such as healthcare, financial services; however, through partner relationships and via direct efforts, we are now able to target customers across a more diverse array of sectors including manufacturing, retail and human resource management. As more services and payment functionalities migrate to mobile and online applications, we see both a growing need as well as a growing appreciation for the value that an added layer of our biometrical authentication can play. Beyond security, this added layer brings both user convenience and efficiency along with the clear audit trail of access to resources, that is not possible with plain passwords. To that end I'd like to briefly speak about the recently announced WebAuthn and other technology standard such as SAML that have been making headlines. WebAuthn is essentially a new specification that was released by the World Wide Web Consortium and FIDO Alliance, that allows browsers to integrate with hardware authentication devices such as USB dongles or biometric readers to make it both easier and more secure the log into browsers and online accounts. But hardware devices will then enable users to prove their identity to sites without requiring usernames or passwords. With WebAuthn enabled browsers and sites, users can utilize BIO-key fingerprint readers and software solutions to securely sign into online accounts. Microsoft, Google and Mozilla have already committed to using WebAuthn and we view the standards as being very favorable in helping to bring biometrics more broadly into mainstream use. We are tracking the standards development closely and working to ensure BIO-key is well-positioned to participate. The Internet of Things is another exciting area of opportunity for BIO-key as its rapid growth is also accompanied by a growing list of potential security vulnerabilities. We are working to position BIO-key solutions to participate in these emerging areas of technology and exploring potential use cases for other biometric applications. Now let’s briefly turn to our more consumer-focused biometric solutions, our line of smart Bluetooth and Biometric-enabled locks. These products which were introduced late 2017, contributed 19% of our total Q1 revenues. Consumers and retailers are embracing these convenient, stylish and secured padlocks; and we are working to expand their distribution via partnerships, new distribution and marketing initiatives. These products are available through online distribution outlets including Amazon and our own e-commerce website www.shop.BIO-key.com, and we expect to see them launch in an array of new online retail websites as well as in certain brick-and-mortar locations over the balance of the year. Just this week two of our TouchLock models became available for purchase at Best Buy and will be in stock in 200 to 300 stores across the U.S. in the next week or two. You will hear more about this shortly. Expanding BIO-key's global distribution also remains a priority for 2018. As we've mentioned before, the Asia-Pacific region presents a large market opportunity for biometrics particularly as we have built our presence there to our Hong Kong subsidiary and a growing base of relationships. For example, nearly 28% of hardware revenues in Q1 2018 were generated at our Asia-Pacific efforts. In summary, we feel the world is increasingly recognizing the security and efficiency challenges of current authentication methods while also awakening to the security and ease of use of biometrics. We feel we are on the right track to leveraging our deep expertise and experience in the biometric field and remain confident on our outlook, and we would like to reaffirm our guidance on revenue and cash flow with breakeven for 2018 and beyond. And with that, I'd like to ask Barbara to provide a quick overview of our sales and distribution strategy. Barbara?

Thank you, Mike. In my remarks today, I will highlight the progress we have made reforming digital sales strategy including our digital storefront as well as incremental efforts we have made to increase international sales for our products and solutions. Our digital sales approach has enabled us to nurture leads that we would otherwise have been unable to track through traditional prospecting. Our goal is to make our digital strategies even more effective by undertaking several additional initiatives, including effectively managing our social media activity to help us identify and connect with the right subset of prospects that meet our established sales criteria. Social media enables us to allow filters, keywords and phrases to target a specific audience with a focus on biometrics and authentication solutions that we can collaborate with and build relationships that will ultimately without in sales. By engaging our prospects through thoughtful content and through our blogs, we can regularly share opinion pieces on several timely and relevant industry subject matters. We find this approach of demonstrating knowledge by sharing insightful content to be a specially useful and building BIO-key as a trustworthy brand to enterprise customers, who are constantly looking for credible information that will help them address their security challenges. We are also in the process of creating a new website that will separate our consumer products from our enterprise solutions that we will launch in the summer and announce once it is complete. Our focus on international markets continues to expand as we intend to take advantage of the broadening demand for secure, convenient, and affordable authentication technology globally. Given our success in Hong-Kong, we are working to build our footprint across Asia. And as Mike had mentioned, we have been keen on increasing our sales and marketing presence in key growth markets including India and Singapore, where we recently signed additional distribution partners with leading technology providers anchored in these two lucrative markets. We are also unlocking the power of data analytics within sales and marketing efforts that will enable us to better monitor our customer level of interest in biometric solutions and placing this level of business intelligence will help us to make sense of data we gather from past customer interactions that should help us predict their future purchases and even guide our sales teams to make better prospecting decisions. While we are still in the nascent stages of building this endeavor, we believe this effort will be reflected in our performance going forward. And with that said, I'd like to ask Ceci to provide a quick overview of our Q1 financial performance and our current financial position. Ceci?

Thank you, Barbara. Our total Q1 '18 revenue decreased to 841,455 from 1,418,335 in Q1 2017 with lower software license, service and fingerprint reader sales partially offset by sales of our Biometric and Bluetooth-enabled locks versus the year prior. Q1 '18 gross margin was negative principally due to an increase in non-cash amortization of software license to 660,000 in Q1 '18 versus 390,000 in Q1 '17, as well as less software license revenue and overall volumes in the current prior year -- in current year. Excluding the license right amortization, gross margin would have been positive in Q1 2018. Q1 '18 operating expenses decreased 12% due to overhead reduction in the reallocation of some R&D costs to cost of revenue which also impacted gross margin. Our Q1 '18 net loss was 2.3 million or $0.30 per basic share compared to a net loss of 1.6 million or $0.26 per basic share in Q1 '17. BIO-key had cash and cash equivalents of 1.3 million as of March 31, 2018 an increase over 0.3 million at December 31, 2017, principally reflecting the collection of certain large receivable. As a result, net cash generated from operations during Q1 '18, was approximately 1 million as compared to approximately 117,000 during Q1 '17. In closing, as a reminder in today's press release, we reaffirmed our 2018 revenue guidance with a range to 8 million to 12 million also we’ve outlined in our presentations, our breakeven goal as 7.5 million to 8.25 million on a cash basis. With that, let's take questions from our investors. Operator, could you please start the question-and-answer session.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Josh Goltry with Maxim Group.

So I’m curious, can you elaborate more on your licensing relationship with China Goldjoy? So have they helped you with additional market share in Asia? Are you seeing any or actually are you seeing more acceptance from your products in that region than in the U.S.?

Great, that is a really good question and the answer is yes. We are working very, very closely on not only with them but a number of partner relationships that we have been building over the last 18 months, out of our Hong Kong and Chinese subsidiary. So we are going to see going forward the deployment of our core software products as well as we already have a very good steady stream of hardware products that we've been deploying across Asia in both the consumer side as well as the enterprise side. But the answer to that question is absolutely, yes. We expect the licenses that we purchased from China Goldjoy Group over two years ago. Now, we will begin -- we've had -- we began to embed them into our technology, into our products, but we will be much more aggressive going forward about selling those solutions in that particular market.

And for the guidance of 8 million to 12 million, is that mostly going to be recognized in the second half I assume?

I will go back to the remarks we've made in the fourth quarter call just two months ago, not even. We don't provide quarterly guidance because it's very difficult for us to predict, especially some of the larger software and hardware orders that we’re working to predict where they will fall quarter-to-quarter month-to-month. And so, we avoid providing guidance such as that because again we are telling right up front that our business is variable. It is very hard for me to determine if the majority of that business will come in the second half or some of it will fall into this quarter. So I can't predict that, but we are highly confident, feeling very good about our annual guidance. We feel good about that from two perspectives where the consumer products business now and we're starting to ramp volume. As I mentioned before just this week, our locks made it into Best Buy. You can see that continue to grow and blossom; however, fingers scanner business which cuts across both the enterprise and the consumer markets is continuing to grow and is growing nicely. And the thermals for our technology as I described with WebAuthn and SAML, and these other standards vital standards that are coming out should hold through additional hardware sales, and off course our traditional software business will continue to grow. So, we are feeling very good across the board that we have a business that diverse enough that we can absolutely achieve our objectives at yearend.

And that regional banking customers, is that a one-time revenue stream? Or is that recurring over the next few quarters?

Every one of our customers, if it's a perpetual license by its maintenance so there is continued recurring revenue, or if they buy a subscription obviously that just continues until they decide not to use the technology. But that bank is not the only bank, we've signed a number of financial institutions over the last 3 to 6 months and that is continuing as well. This is a smaller regional bank. We've also signed some larger ones and it really depends. Some of them prefer a perpetual software license purchase. Some of them prefer a subscription, but either way there is recurring revenue that's associated with every deal. And generally speaking, customers will start with a defined employee population and then they will expand. And so, almost every one of these deals that we've closed over the last year has expanded with additional users or additional hardware purchases overtime, so that's the beauty of this business.

[Operator Instructions] Okay, there is nothing else for the present time. So, I would like to return the call to Mr. DePasquale for any closing comments.

Thank you and thank you everyone for participating in today's call. We hope you will join us again for our second quarter conference call in the summer. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.