AWARE INC /MA/ Q3 FY2026 earnings call

• Government Strategy Progress: AWARE secured a new government agency customer to deploy intelligent liveness capabilities, marking a shift from pipeline engagement to active deployment. This follows increased solicitation activity post-DHS funding restoration.
• Platform Focus & Expansion: The company is transitioning from a product/component business to an orchestration platform model. There is continued expansion within existing customer bases through upselling and cross-selling capabilities like liveness, matching, and orchestration.
• Commercial Growth: New relationships include a distributor partnership with Adobe Acrobat Sign for biometric security and increased interest in Latin America and North/South America.
• Cost Discipline: Actions taken earlier in the year resulted in approximately $4 million in annualized cost savings, visible in Q3 as operating expenses decreased from $6.4 million to $5.4 million.
• Financial Health: The operating loss narrowed to $0.9 million (from $1.3 million). The company ended the quarter with $15.4 million in cash and no debt.

Total revenue was $4.4 million, a decrease from $5.1 million in the prior year period. Recurring revenue grew to $4 million (from $3.6 million previously), representing over 90% of total revenue for the quarter. The year-over-year decline in total revenue was driven primarily by lower perpetual license sales, while the increase in recurring revenue was driven by on-premise term licenses.

• Q4 Revenue Expectation: Management expects the fourth quarter to follow its typical seasonal pattern of growth, with a generally similar mix of recurring and non-recurring revenue to Q3.
• Expense Structure: Operating expenses are expected to remain generally consistent with the lower cost structure established following the actions taken earlier in the year.
• Long-term Outlook: The actions taken in 2026 aim to position the company better for 2027, focusing on a more focused platform approach, lower operating costs, and greater emphasis on recurring revenue.

• Revenue Volatility: Recurring revenue can still vary from quarter to quarter due to the timing of on-premises term license renewals and deliveries.
• Federal Procurement Uncertainty: Federal and national security procurement cycles remain difficult to predict, and progress is not expected to occur in a straight line.
• Market Transition Risks: The transition from a product-based business to a platform business is complex and will not happen overnight; many customers still require self-hosted deployments.
• Regulatory Compliance: The company faces potential risks related to maintaining NASDAQ listing requirements regarding stock price.

Q: John Phillips asked if federal procurement backlog cleared into Q3 revenue and if AWARE is bidding on the upcoming USCIS IBIS contract.

A: CEO Ajay Amlani stated that while DHS reopenment led to record procurements, the backlog is not fully cleared yet, with significant activity expected over the next 12-18 months. He declined to comment on specific bids or prime/subcontractor status due to confidentiality but confirmed active engagement in DHS modernization efforts.

Q: David Traverse was asked to quantify the Q3 bottom-line impact of the $4M annualized savings and provide a timeline for sustained net income break-even.

A: Traverse confirmed the $4M annualized savings were realized in Q3, evidenced by the drop in operating expenses. However, he stated there is no specific timeline provided for achieving a sustained net income break-even baseline under the new cost structure.

Q: Phillips inquired about the composition of Q3 recurring revenue growth, specifically the split between high-margin SaaS and volatile perpetual licenses.

A: CFO David Traverse clarified that while recurring revenue grew, the shift to a cloud-based platform is gradual. He emphasized that recurring revenue remains subject to quarterly variability and urged investors to look at multi-quarter trends rather than single-quarter performance.

Q: Brian McCabe addressed whether additional features like passive liveness were expanded into the top financial institution account and described the broader commercial pipeline.

A: McCabe noted that while he cannot discuss specific contracts, the company uses a 'land and expand' model and sees strong net dollar retention. He highlighted consistent market interest in the awareness platform and enthusiasm for its impact on revenue through this approach.

Q: Glendon Nickerson Jr. asked if listed companies on the website are current clients and if AWARE targets fraud areas beyond airports/DHS, such as welfare or banking fraud.

A: McCabe confirmed all listed entities are current customers. CEO Ajay Amlani added that biometrics apply broadly to fraud prevention (banking, benefits, etc.), but the company relies on partners and systems integrators to reach these markets, focusing on identity verification and liveness detection within broader fraud strategies.