BIO-key International's (BKYI) CEO Mike DePasquale on Q2 2015 Results - Earnings Call Transcript
Aug. 14, 2015 2:20 PM • BKYI
BIO-key International, Inc. (OTCQB:BKYI)
Q2 2015 Earnings Conference Call
August 15, 2015 10:00 AM ET
Executives
Jay Meier - Vice President-Corporate Development
Mike DePasquale - Chairman and Chief Executive Officer
Ceci Welch - Chief Financial Officer
Analysts
Frank Waffles - Private Investor
John English - Private Investor
Dan Kamis - Private Investor
Jeremy Hellmen - Avenue T Fund
Gary Sironi - Private Investor
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BIO-key International 2015 Second Quarter Conference Call. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded today August 14, 2015.
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I would now like to turn the call over to today’s host, Jay Meier, BIO-key’s Vice President-Corporate Development. Sir, you may begin.
Jay Meier
Good morning and thank you for joining us today for our second quarter conference call. With me today are Mike DePasquale, BIO-key’s Chairman and CEO; and Ceci Welch, BIO-key’s Chief Financial Officer who will review our results and milestones before opening up the call to questions.
Before we begin I must 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, project, intends, expects, 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 more complete description of these and other risk factors please review Risk Factors in our Annual Report on Form 10-K and other SEC filings. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date. BIO-key undertakes no obligations to revision any forward-looking statements to reflect future events or circumstances.
And I'll now turn the call over to Mike.
Mike DePasquale
Thank you, Jay. And welcome and thank you for joining us today on our second quarter earnings call. BIO-key achieved record revenue and net income in Q2, 2015, and importantly that business activity will yield substantial cash in flows to the company. Our performance in Q2 and to date supports our view that the market for secure biometric technologies which can accurately identify individuals in a broad range of mission critical electronic transactions continues to build momentum on a global basis. Our performance in the quarter was powered by a significant follow on license order to use our fingerprint biometric solutions to expand the program for a larger international customer. This order is important on a number of fronts as it underscores the strong cumulative add on opportunity in our existing install base. Clearly the challenges faced by this customer are present around the world and across many different industries and applications. BIO-key and its partners are working to help leverage our success to develop more such type opportunities.
A fundamental challenge posed by our connected economy is ensuring that the person, the individual that is being granted access to network resources data for the ability to transact is actually the person they claimed to be. This claim is validated by a live scan of the fingerprint that is accurately compared to either a database or a fingerprint temp which stored on their device. The simple but powerful action provides enormous benefits to strengthening the security infrastructure that we see breaking down regularly on the evening news. Drilling down a bit beyond healthcare which we have often address a significant area of growth for biometrics is also the financial sector. Where recently released research indicated that nearly one third of the largest US banks plan to make biometrics available to their mobile banking customers by the end of this year. Providence based Citizens Financial Group incorporated fingerprint identification in its mobile banking app for iPhone users last month. Fidelity Investment incorporated fingerprint identification for their customers to log into their trading accounts and pay bills. These financial institutions actions are the result of market demand for more secured identification and the convenience and replacement of traditional passwords.
Yet many of the early consumer biometric deployments mostly on mobile phones had sacrificed security features and functionality in an effort to deliver ease of use and convenience to the consumer. One recent example was the news of an android phone fingerprint reader that could be easily hacked and have stored fingerprints lifted of the user's phone. We believe BIO-key is a very well positioned to offer its robust, accuracy, security and biometric transport solutions within an environment as experienced the wow factor but wants to make sure the solution is sufficiently robust for enterprise and consumer security.
I'd like to follow up on a couple of main topics. Number one some discussion on management restructuring within the company. As the business continues to evolve, we took the opportunity during the second quarter to enhance the strengthen efficiency of our senior management team for the benefit of the company and its growth prospects. Specifically, Jim Sullivan, our VP of Strategy and Business Development which recently promoted to the role of Senior Vice President of Global Sales, replacing Jim Skidmore who has left the company after a year and half. Jim Sullivan is a recognized expert in biometric authentication for consumer and mobile applications. He has been with BIO-key for over 12 years and his prior experience was working with Identity Management Solutions and Computer Associates Platinum Technology and MAMCO software. During this tenure with BIO-key, Jim has worked directly with many of our customers including AT&T, LexisNexis, MCR and McKesson Aesynt on large scale biometric centered identity management projects. We came to recognize that the skills and expertise Jim has exhibited would be best applied in the global sales arena. So recently move to elevate him to this role. We are very, very confident he will prove extremely successful.
On the partnership front, our partnerships with major OEMs integrators and solution providers remain a critical component of our go-to-market strategy. As they bring us into provide best of breed user authentication technology to solve their clients' security needs. We've recently signed an agreement with Avnet the application specific licensing agreement we executed continues to accelerate opportunities from various vertical markets. Our pipeline accommodates the potential revenue from our IBM middleware software integration relationship. We have a partnership with Aventura recently executed. That relationship continues to ensure that they provide a compliant computing solution that needs federal requirements by protecting sensitive electronic health records and optimizing clinicians work flow. As we've previously mentioned, the vast majority of our opportunities are within highly regulated industry such as healthcare that is mandating to factor authentication methodologies to protect patient data. Fingerprint biometric technology ideally addresses these requirements as it is the only broadly deployed method that can directly attested to identify of an individual for prescribing purposes.
At the recent HIMSS event BIO-key was well represented and at the conference as Hin [ph] of our partners in healthcare IT showcased our authentication solutions at the conference. The conference provides an unprecedented exposure for our solutions in an industry that has been driven by regulations as I previously stated to adopt stronger authentication solutions.
We also executed an MOU with Worldwide Touch
Technology and so I wanted to briefly mention our discussions with the Hong Kong based partner Worldwide Touch continue. During Q2, we executed the memorandum of understanding to make for them to make a significant strategic investment in BIO-key that would strengthen our financial position and better support the expansion of our business. Also we would jointly develop and market products based on our respective biometric technologies. The discussions just still at the early stage and so it is premature to comment further. I can say that we view such partnerships as important to building BIO-key's reach and strength in the market. In all such dialogues BIO-key's goal is to secure terms that we believe would be embraced by our shareholders.
A broad glance at the global biometric industry shows that Asia represents some of the earliest and fastest growing adopters of biometric technology. The large population numbers and the move by Asian governments to enhance national security with secure biometric technologies strengthen the outlook on growing expenditures in biometrics in the region. Our partnership with Worldwide Touch Technology should help us expand our global reach particularly in the Asia Pacific markets.
Today, we reiterated our confidence in achieving our revenue guidance of $5 million to $7 million for the full fiscal year. Through the first six months of the year, we are tracking at the midpoint of our full year revenue guidance. Looking now over the second half of 2015, we anticipate stronger sales activity in the fourth quarter than the third and provide an initial Q3 revenue guidance range of $700,000 to $1.5 million, first to see year ago Q3 revenue of $1.3 million.
So with that overview, I'd like to Ceci to provide some additional comments on our Q2 financial performance and then Jay will review our Q3 and 2015 sales outlook. Ceci?
Ceci Welch
Thank you, Mike. Beyond the results presented in our news release this morning, I'd like to add just a few additional comments. Service revenues decreased slightly to $255,000 in the second quarter of 2015 from $282,000 in the second quarter of 2014, principally marking reduction in the elevated 2014 service revenue levels related to our fingerprint sensor partnership with IDEX.
In the second quarter of 2015, gross margin increased to 94% from 60% in the second quarter of 2014principally due to the substantial increase in high margin software license revenue. In Q2, highly regulated industry represented approximately 83% of total sales with OEM representing roughly 80% of total sales. Our second quarter operating expenses of $1.4 million are roughly in line with the levels we expect to continue for the balance of the year. However, we do plan to scale our sales and marketing and R&D expenditures as the business performance allows, which we will anticipate will accelerate our growth trajectory.
The second quarter net income of $753,000 or $0.01 per diluted share count of 66 million share reflecting our February 2015 2 for 1 reverse split.
Now turning to our balance sheet. BIO- key had total current assets of $2.4 million including cash and cash equivalents of $282,000 at June 30, 2015. We anticipate our liquidity position to be enhanced during the third quarter by receipt of the cash from the large $2 million license order that we completed late in the second quarter of 2015.
And with that overview, I'll hand the call back over to Jay Meier to review our financial guidance and sales outlook. Jay?
Jay Meier
Thanks, Ceci. As we've discussed previously BIO-key has put in place a disciplined process to track our customer revenue potential both direct and a through partners for the next rolling 12 month period, which we call our pipeline of opportunities. And then we implemented a methodology to translate that data into a full year and quarterly revenue guidance. Because the opportunities are typically -- we've typically pursue can often exceed several hundred thousand dollars and their timing is depended on a range of customer and partner factors, that are often outside of our control, our quarterly performance is difficult to forecast and will likely vary from quarter-to-quarter. As a result, to truly evaluate our progress investors need to assess our performance over a period of a year or more. However, we expect this variability to smooth over time as our business grows and matures.
As reported in today's press release, our opportunity pipeline decreased to $25 million as of today's call from $30 million as of the first quarter conference call. The decrease reflects the impact of sales and bookings we reported during Q2 as well as the impact of normal seasonal slowness in procurement activity that occurs each year as a result of many fiscal years that end September 30. In other words our prospects capital expenditures progress through the year and our budget it is starting after about September and that impacts our pipeline growth.
Moving into the fourth quarter is where we would again expect to gain visibility on new procurement activity to possibly support continued growth of the pipeline. Highly regulated industries those that are most actively mandating to factor and other improve security of authentication measures and is therefore key area of opportunity for us represents roughly 85% of our 12 month opportunity pipeline. In the hardware OEM and other channels represents approximately 75% of our 12 month opportunity pipeline. Focusing on just potential orders, we believe we could close in a third quarter we have roughly 31 opportunities that totaled approximately $3.5 million in sales potential during Q3. Within the Q3 measure, approximately 58% is within highly regulated industry and 75% comes from the hardware OEM and channels.
Based on our opportunity pipeline analysis and the results to date, we continue to expect fiscal 2015 sales to be between $5 million and $7 million with gross margin of 75% to 80%. Our current annual breakeven revenue run rate is approximately $6.5 million. And for the third quarter of 2015, we expect revenue in a range of $700,000 to $1.5 million which could keep us tracking -- should keep us tracking comfortably within our full year revenue guidance range. Headcount currently stands at 18 employees and 4 contractors with 4 in administration, 7 in sales and marketing, 8 in research and development and 3 in support. We expect a hire in sales, support and R&D throughout the remainder of the year.
And with that operator, let's open the call to questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions]
And our first question comes from Frank Waffles, Private Investor. Please go ahead.
Frank Waffles
Hi, guys. So fingerprint card and Synaptics has made quite a few large sales, I have been reading about electro last year and I know you guys have relationship with IDEX and NEXT Biometrics so I just kind of wondered if you can explain or possibly explain why do you think IDEX and NEXT Biometrics technology is better than fingerprint cards and Synaptics, if you were to believe that and if not, why have those guys not come to you guys to partner with as well. Thank you.
