AWARE INC /MA/ Q3 FY2025 earnings call

• Ajay outlined the 3-pronged transformation strategy: advancing core biometric technology (focus on Liveness and the Awareness Platform), strengthening the customer-obsessed go-to-market model, and deepening strategic relationships/partnerships. - Market context: Shift in customer perceptions of biometrics with Liveness Detection becoming critical for fraud prevention. - Federal market: Growth in demand but federal shutdown delaying appropriations; commercial market: Secured new contracts in financial services and workforce management. - Brian highlighted diverse demand across government and enterprise, expansion with a major U.S. federal agency by adding Intelligent Liveness to a program, and progress in the partner ecosystem.

In the third quarter, revenue was $5.1 million, a 33% year-over-year increase. The growth was driven by a $1 million perpetual license expansion sale with an existing customer and a $600,000 new term license contract, offset by fluctuations in perpetual license and lower services and other revenue. Year-to-date revenue was $12.6 million. Operating expenses for the quarter were $6.4 million compared to $5.4 million in the prior year quarter. Net loss for the quarter was $1.1 million or $0.05 per diluted share, an improvement from the prior year quarter's net loss of $1.2 million or $0.06 per diluted share. Adjusted EBITDA loss was $800,000, better than the prior year's $1.1 million adjusted EBITDA loss.

• Expect operating expenses to increase in the fourth quarter due to investments in growth strategy. - Focus on driving more recurring and predictable revenue. - Federal shutdown has impacted near-term bookings, but anticipation of deal flow once shutdown is resolved.

• Federal shutdown slowing appropriations and causing delays in federal biometric programs. - Quarterly results may vary based on timing of customer decisions and license mix.

Q: Q3 revenue grew 33% year-over-year but was flat year-to-date. Can you elaborate on the drivers of that variance and how investors should think about the sustainability of that top line growth in 2026?

A: We're striving to build a more sustainable revenue model with a meaningful license component business where timing creates variability. Strong Y/Y growth in Q3 shows demand, but flat YTD reflects timing. With management changes, focus on recurring and predictable revenue for smoother results.

Q: You mentioned that quarterly results may fluctuate based on the timing of customer decisions and license mix. Can you give more color to the pipeline conversion patterns? How much visibility you have in the near-term deals and recurring revenue contribution?

A: With the new management team, we've emphasized building a disciplined go-to-market engine. There's healthy engagement and visibility into opportunities, though timing of customer decisions affects quarterly results. Expect more consistency and better conversion over time as the process matures.

Q: Ajay you called out the federal budget delays and shutdown impacts on appropriations. How significant has that been the near-term bookings? And are those revenues expected to shift into FY '26?

A: The government shutdown has impacted near-term bookings, but conversations are still occurring. We anticipate significant deal flow and conversations once the shutdown is over, with the budget allocated still remaining and urgency to deploy.

Q: As enterprises move towards biometric anchored digital identity, who do you view as your primary competitors in the space? What differentiates Aware's Awareness platform technically and commercially?

A: On the Awareness platform, competition is often internal development vs. using an outside vendor like Aware. For individual components, there are other competitors, but we focus on selecting best-in-class components for key use cases to provide secure and effective experiences for customers.

Q: How do you prioritize new certifications like ISO or FedRAMP in your road map? And are there any gating factors for certain federal or enterprise contracts?

A: Certifications like ISO, FedRAMP, and FIDO are important for customer security. We invest in pushing the envelope with certification organizations to protect against modern threats. Certifications act as gating factors in RFP processes for customers.

Q: David, operating expenses rose due to investments in sales, marketing and products. How should we go about expense levels and operating leverage in FY '26 as revenue scales?

A: Operating expenses increased as we invested in sales, marketing, and go-to-market for growth. We'll continue to invest where there's a clear line of driving top line revenue expansion while maintaining a disciplined focus on efficiency.

Q: Ajay, can you share any color on the national ID contract?

A: At this point, we can't share specific color on the national ID contract, but we focus resources on the Americas and seek best partners globally for national ID programs.

Q: Has Aware considered enabling interactions with smaller platforms?

A: We pay attention to smaller platforms but prioritize those with growth potential based on management team, customer contacts, and product capabilities to align resources effectively.