Yahoo Finance BIO-key International, Inc. (NASDAQ:BKYI) Q4 2023 Earnings Call Transcript
BIO-key International, Inc. (NASDAQ:BKYI) Q4 2023 Earnings Call Transcript April 2, 2024
BIO-key International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone. Thank you for standing by, and welcome to BIO-key International's Fourth Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today Tuesday, April 2, 2024. Now I would like to turn the call over to Bill Jones with Investor Relations. Please proceed, sir.
Bill Jones: Thank you, and thanks to all for joining today's call. Our hosts today are BIO-key's Chairman and CEO, Mike DePasquale; and CFO, Ceci Welch As a reminder, today's conference call and webcast as well as answers to investor questions. include forward-looking statements, which are subject to certain risks and uncertainties that can cause actual realized results to differ from those currently expected. Words such as anticipate, believe, estimate, expect, plan, project or similar words typically expressed and identify forward-looking statements. These statements are made based on management's beliefs and assumptions as of today and using information currently available pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
For a complete description of these and other risks that may affect the future performance of the company, please see risk factors in the company's annual and other reports as filed on Form 10-K with the SEC. Listeners are cautioned not to place undue reliance on such forward-looking statements, which speak as of today only. BIO-key undertakes no obligation to revise or disclose revisions to these forward-looking statements to reflect circumstances or events that occur after today. And now let me pass the conference to Mike. Mike?
Mike DePasquale: Thank you, Bill, and good morning, and thank you all for taking the time to be with us today. After my remarks, Ceci will provide a brief overview of our performance and we will then open the call to your questions. At the outset, I did want to mention that because the audit of our 2023 financial statements has not yet been completed by our independent accounting firm. We were not able to report our full financial results in today's release. And instead, we provided an overview of our preliminary results, which are subject to change. We have filed a Form NT 10-K with the SEC which provides us an additional 15-day period in which to complete and file our audited 2023 results. Now turning to 2023. I want to thank the entire global BIO-key team and our partners for their dedication and hard work that enabled us to achieve substantial top line and bottom line progress in 2023.
BIO-key grew revenue by approximately 29% to $9.1 million, and we were able to trim our adjusted operating loss, adding back inventory reserve by nearly two-thirds to $3.6 million, substantially advancing the company to our goal of profitability. Following the close of 2023, we completed a 2-year $1.5 million prepaid license agreement with a longtime financial services customer, enhancing our balance sheet to fund 2024 growth initiatives. Over the past year, Identity and Access Management continued to build in importance as more and more enterprises navigate security, efficiency and cost challenges related to their transition to the cloud. This ongoing migration and the increasingly hybrid work environment provide a range of growth opportunities for BIO-key, both with new customers and through the transition of on-premise customers to the unique benefits of our ID Software-as-a-Service solutions.
More and more enterprises are experiencing a greater number and a variety of security incidents, reflecting new attack mechanisms, reducing the efficacy of their cybersecurity defenses. Adding to the challenge are persistent shortages of cybersecurity personnel to prevent and respond to cyber-attacks and threats. Further supporting the adoption of enhanced Identity and Access Management solutions are a growing array of regulations, standards and even insurance underwriting requirements. As we have mentioned, multifactor authentication and passwordless security are already front and center for any business that wants or needs to receive cyber insurance coverage. And the SEC's new cyber risk management and reporting rules went into effect at the end of 2023.
Finally, the Cybersecurity and Infrastructure Security Agency will formally publish its proposed rules for cyber incident reporting this week with a 60-day public comment period. The CISA rules would require covered entities to promptly report cyber disruptions and ransomware payments and is just another framework that will put cybersecurity top of mind for all enterprises, no matter what size in 2024. We believe these examples serve as a very favorable backdrop for the future sales of our key product solutions, including PortalGuard IDaaS and WEB-key, which provide organizations an integrated approach to managing and securing all of their digital identities with technologies they already use while providing flexibility to support future needs.
Our platform allows users to authenticate their customers, employees, contractors and partners. It enables any user to connect to any device, cloud or application, all with a simple, customizable, intuitive and consumer-friendly user experience. We use service security identity bound biometrics to support roving users without requiring them to carry their phone or a token. In response to the proven vulnerability of passwords, 2023 witnessed mainstream adoption of passkeys by Google, Apple, Amazon, Microsoft and others due to the versatile security user-friendly authentication experience that they provide. Passkeys utilized a combination of cryptography and publicly infrastructure to authenticate users to websites and applications without the need for passwords.
We believe the global use of Passkeys which eliminate the use and inherent risk of passwords will continue to expand at a rapid pace. To position BIO-key in this large growth opportunity, later this month, we plan to introduce Passkey:YOU, the first Passkey solution that utilizes biometric authentication instead of relying on phone or hardware-based token methods. This differentiation makes our solution particularly compelling for a variety of enterprise use cases with planned enhancements to the solution coming out later this year. Turning to our go-to-market strategy. In the U.S., our direct sales team is focused on a pipeline of larger customer opportunities. And while the sales cycle is typically much longer for these initiatives, they provide much greater potential to drive meaningful revenue recognition and opportunity going forward.
Our other path to market is through the global channel alliance partner, or CAP program, which continues to build both in its geographic scope and its sales productivity. We have built a base of over 150 partners, including resellers, system integrators and other distribution partners. We're committed to supporting the growth and success of our channel partner base in 2024 as it represents a very efficient and cost-effective means to expand our global customer reach. Our direct and channel sales strategy enabled BIO-key to achieve solid growth over the past few years, and we expect it to contribute to meaningful top and bottom line improvements in 2024. The recurring nature of our SaaS and services model has provided a growing revenue base on which to add new deployments through new customer wins and the expanded penetration of existing accounts.
Annual recurring revenues represented more than 70% of BIO-key's total revenue in 2023 with a blended gross margin of approximately 65%. I've touched on many of the reasons for a very positive market outlook for 2024. But what is critical is the very attractive value proposition that our products provide plus the fact that enterprise security needs are not currently being met by mainstream authentication methods. We are an industry leader in offering 17 authentication methods. And within our IAM solutions to meet an ever-evolving customer demand and use cases. However, it is our deep biometric experience and intellectual property and the strategic use of biometric technology provides that greatest differentiation for us and for our IAM solutions and our IAM customers.
We currently have more than 600 customers across multiple industries using BIO-key to secure and manage access for approximately 40 million users around the world. And we have partnered with some of the larger IAM industry players like SailPoint, Ping, and ForgeRock to expand our reach into enterprise accounts with deployed IAM solutions that can upgrade their multifactor authentication to include ours. And as our brand becomes better known, we are increasingly finding that enterprises who have significant risk are turning to our channel partners and to our direct sales organization to upgrade their existing MFA to ours. For these and other reasons, we are excited and optimistic about BIO-key's potential to deliver continued growth and bottom line improvements in 2024 and beyond.
With that, I'll turn the call over to Ceci Welch, our CFO.
Ceci Welch: Thank you, Mike. As Mike referenced, the audit of our 2023 financial statements has not yet been completed by our independent registered public accounting firm and therefore, are numbers provided in our release and our remarks today are preliminary and therefore, subject to change. 2023 revenues increased 29% to $9.1 million from $7 million in 2022 driven by increases in all license fees, hardware sales and service revenue. Service revenues benefited from custom services for our new installations, civil security service fees and conversions from on-premise deployment of PortalGuard - to our PortalGuard IDaaS cloud platform. Hardware revenue benefited from the fourth quarter sales to a foreign defense agency in 2023, likewise Q4 '23, revenue grew 26% over Q4 '22, also driven by the aforementioned hardware sales to the foreign defense agency.
In Q4 2023, we took a $2.8 million noncash reserve on slow-moving inventory purchased for large projects in Nigeria in Q4 2023. The reserve expense, which was included in the cost of hardware, positive decline in the gross profit to $3.3 million in 2023 from $4.6 million in 2022. Excluding the noncash charge, our gross profit would have increased 34% to $6.1 million in 2023. Also excluding the reserve, our gross margin would have increased to 67.6% in 2023 from 65.2% in 2022. We continue to pursue opportunities to monetize this hardware in Africa and other to further support our growth in operations. Turning to operation expenses. Our SG&A decreased 22% to $7.3 million in 2023 reflecting lower sales and marketing expenses, including personnel and related benefits and outside services expenses.
Our channel-centric sales strategy is also allowing us to grow with minimum payments of all the related commissions or discounts to total revenue. Further, as many of our teams can now work remotely, we have downsized our corporate headquarter footprint in New Jersey in 2023 reducing annual lease expense and related occupancy costs. These cost-cutting initiatives were slightly offset by higher professional fees related to regulatory filings and costs related to debt repayment and reverse split. Research and development included engineering expenses also declined by approximately $900,000 or 26% due to reductions in personnel-related benefits and outside service expenses. Our operating loss was trimmed by $3.5 million to $6.4 million in 2023 versus the operating loss of $9.9 million in 2022.
We continue to focus on cost-saving initiatives in 2024 to support our path to cash flow breakeven and profitability. In terms of our bottom line and reflecting revenue improvement and lower operating costs, IoT significantly trimmed its net loss by 48% to $6.2 million in 2023 from $12.2 million in 2022. Likewise, the Q4 '23 BIO-key reduced its net loss to more than 40% to $4.1 million from $6.7 million in 2022, with both 2023 periods being impacted by the $2.8 million inventory reserve. As of year-end, BIO-key has current assets of $5.3 million, including $0.5 million of cash and cash equivalents and $3.2 million of accounts receivable and do form factor and $1.2 million of inventory net of the $3.2 million reserve. Subsequent to the year-end, as we have mentioned in this release, BIO-key received $1.5 million in cash related to an expanded 2-year extension and expansion of license agreements with long-term financial services customer that utilizes our biometric technology for customer authentication.
That concludes our prepared remarks. And now I turn the call over to the operator for Q&A.
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