October 26, 2018 - 10:56am EST by
2018 2019
Price: 3.62 EPS 0 0
Shares Out. (in M): 22 P/E 0 0
Market Cap (in $M): 78 P/FCF 0 0
Net Debt (in $M): -49 EBIT 0 0
TEV (in $M): 29 TEV/EBIT 0 0

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  • Biometrics


Aware (AWRE) is a biometrics software business that is at an important business inflection. Because of its small size, non-promotional management team (no conference calls, no investor presentations, no sell-side coverage), and lack of TTM earnings due to a near-term shortfall in their government biometrics business and a significant investment in R&D (up 90% since 2013 despite lower revenues), investors have missed this inflection in AWRE's commercial biometrics business that has the potential to drive significant upside.


In Q3 2018, AWRE announced the first signing of a significant commercial biometrics customer.  Commercial biometrics is rapidly entering the mainstream and moving upstream into more complex applications. AWRE's high-end software and sterling reputation with demanding government clients leaves well positioned to take share in as commercial biometric applications continue to tackle more complex challenges.


As AWRE continues to roll-out its commercial biometrics software,  the company's results should increase dramatically.  With downside well-protected by net cash and the company's existing stream of government maintenance revenue, the current share price is a cheap option on the company's potentially significant upside.


Capitalization and Valuation

AWRE has 21.6mln shares for a 78mln market cap at $3.62.  The company has 49mln of cash on the balance sheet ($2.27 per share) and no debt for an EV of 29mln.  TTM revs were 15.4mln (1.9x) and book value is 61.2mln or $2.83 per share.


Commercial Biometrics

AWRE's commercial biometrics division is focused on high-end applications in banking, healthcare, retail and other industries.  These addressable markets are all very large.  As industry researcher Goode Intelligence notes, they expect biometric systems developed for solely the banking industry to be wroth $4.8bln by 2023 and the 1.9bln bank customers will be using biometrics for most banking transactions by the end of 2020.


Aware's main solution in the commercial biometrics space is its Knomi platform which Enterprise Security Magazine named one of the Top 10 Multifactor Authentication Solution Providers in 2018.  Knomi is flexible solution allowing multimodal (face, voice, keystroke) biometrics in either a server or device-based environment that is compliant with FIDO authentication standards.


Conversations with industry experts have confirmed that AWRE has a robust, standards compliant product which is very well-suited for high-end biometrics applications.


Historically, AWRE's problem has been that the product was too high-end for early commercial biometrics that were relatively simple.  For example, most early commercial biometrics has been 1-to-1 matching (proving you are you, ex. unlock your phone etc) is much simpler than 1-to-N (authenticating your identity among all people in a population, ex. identify yourself to a 3rd party).  While 1 to 1 has been fine for relatively small transactions, as commercial biometrics gets more advanced (large wire transfers, remote KYC etc), the commercial biometrics industry has started to increase in complexity and has begun to enter AWRE's sweet spot.


The sales cycle for commercial biometrics has been long but finally in Q3 2018 AWRE announced a large license sale of its Knomi solution to a large commercial customer which could be the tipping point for this business as the customer's competitors will race to catch up with the first mover.


Even more attractive, the commercial business is expected to be sold as biometrics-as-a-service which should provide a more attractive stream of recurring revenues compared to lumpy 1x government license sales.  As AWRE's revenue stream becomes smoother and more predictable, I expect investors to afford that revenue a significantly higher multiple.



AWRE's historic business has been selling biometrics for government applications.  Customers include Department of Homeland Security, the US Department of Defense, the US Navy, US Marines, US Department of Justice, US Department of State, UK Metropolitan Police, UK Government for a central biometrics system, German Federal Criminal Office, Singapore Ministry of Home Affairs, Royal Canadian Mounted Police, Kingdom of Saudi Arabia and variety of other governments globally.


This reference list of top-end government clients shows the quality of AWRE's solution.  The problem with the government business is that licenses are sold on a perpetual model which means that revenues can be unpredictable and lumpy as there can be long-periods between upgrade cycles and new government purchases.


This business has suffered from a recent down-cycle as several large awards concluded in 2016/17 and the company had not closed any large new deals.  Demand in the Middle East has been hurt by the drop in the oil price and demand in Brazil has been hurt by the government chaos currently unfolding.


Future government demand for biometrics is expected to be robust.  The Biometrics Research Group projects that global law enforcement biometrics market will grow to $18bln by 2020 from its 2015 value of $7.5bln.  While AWRE's software only addresses a fraction of that market, I expect their high quality solutions and list of strong reference customers to position them well for future government contracts although the signings will be lumpy and unpredictable.  In Q2 18, AWRE signed a deal as a subcontractor on Fujitsu's $38mln deal with the UK government which is being implemented over 5 years.



In September 2015, AWRE announced a partnership with Certisign, the largest supplier of digital security in Brazil to build a cloud-based biometric-as-a-service software platform called Certibio. This platform would be used for identity proofing and authentication for customers including banks, retailers, telecom companies, healthcare providers and government agencies so that the company can know that the person who applies for the service is who they claim to be, which will help combat fraud which is a large problem in Brazil.


Consumers can enroll at any of Certisign's 1,600 locations throughout Brazil which will allow them a way to verify their identity for consumer transactions, job applications, and government benefit.s  As the software as a service provider, AWRE will receive a per-transaction fee from Certisign for whenever the service is used.  Once the rollout is complete, AWRE should be to generate significant recurring revenue as Brazilian enterprises use it to verify idenity for any number of transactions.


Certibio has been disappointing to date as the upheaval in the Brazilian government has prevented widespread rollout.  While this delay has been frustrating, any stabilization in Brazil creates the opportunity for significant future upside.


While we don't have a great estimate of the size of the Certibio opportunity for AWRE.  The company has refused to make any specific estimates, instead only noting that they are "excited by what this partnership may mean for Aware’s business.” However, in 15 during the pilot phase at a few locations, we do know that AWRE generated 2.2mln of revenue in Brazil, which should be mostly related to the Certibio program since Brazil revenue was insignificant before that program began.  I believe it is safe to assume that Certibio revenue would be much larger than the pilot phase if it is ever rolled out nationally across Brazil.



Shareholder Friendly Capital Allocation

Insiders including the Stafford family and management currently own 40% of shares outstanding and have shown consistent shareholder friendly capital allocation. The company has paid out a series of special dividends with a cumulative value of over $100mln to shareholders.   The company paid the first special dividends in 2012 after the receipt of the patent proceeds and paid another special dividend in July 2014 after deciding that current asking prices for potential biometrics acquisitions were unreasonable.    

Since Q2 2016, the company has embarked on a significant buyback program as they believe their shares are undervalued.  Over that period, the company has acquired 1.8mln shares representing ~8% of shares outstanding and 12% of the float.   Given the volume limitations of buying such a thinly traded stock, this is an impressive level of repurchasing.


The company has also created value for shareholders by being willing to make tough decisions including shuttering its DSL business in 2012-13.  AWRE management has also been able to find unexpected sources of value by selling their excess patents in 2012 for $91mln.



While I believe it is tough to predict the upside with any precision, here is how I think about it.  AWRE's government biometrics business  historically generated ~16-24mln of revenue over the past 5 years.  The commercial business has the potential to be significantly bigger than the government business due to the larger TAM but lets assume it reaches a similar level of 16-24 mln.  From 2013-16  EBIT margins ranged from 20-24%.  Using these margins and a 15x EBIT multiple for a growing software company suggests a share price of ~$6.70-$10.25.



I will be the first to admit that this exercise is VERY ROUGH.  My goal is not to provide price targets but more to show that the potential for significant upside exists. If commercial biometrics really hits, upside could be far greater but that is very uncertain.


I would also note that the company has bought back stock as high as $5.98 per share during the course of the current buyback.  Given their large ownership and significantly greater visibility given AWRE's very long sales cycles, I believe these repurchases support the idea that the board believes that AWRE is worth significantly more than current trading levels.



More importantly AWRE has very strong downside protection.  In addition to $2.27 per share of net cash, AWRE's government biometrics business generates a steady stream of maintenance revenues (5.3mln in TTM).  With a discounted 3x multiple on maintenance revenues and ignoring all license and services revenue, AWRE is worth ~$3 per share (chart).


$2.83 of book value per share also provides downside support as a successful software company should not trade at book.Book is also likely understated as the company owns its headquarters which is a 72k square foot office building in Bedford, MA.  AWRE acquired the building for $6.66mln in 1997 (vs. 4.1mln of total PPE) and should be worth significantly more than that.  I have not included this in any of my valuation numbers as I don't expect the company to sell it.



Government biometric business has been lumpy which can lead to volatile results

Commercial biometrics business is still very early stage and tough to predict

Very illiquid stock

Staffords control the board



As a result of the company's strong downside protection, AWRE's current share price provides a very cheap option for significant upsideon a business that appears to have reached a positive inflection point.



Goode Intelligence, Biometrics for Banking; Market and Technology Analysis, Adoption Strategies and Forecasts 2018-2023: Second Edition



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued growth of commercial biometrics business

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