BIO-Key's Q3 2025 Earnings Call: Contradictions in Defense Contracts, Operating Expenses, ARR, and Growth Projections

Date of Call: November 14, 2025

Financials Results

• Revenue: $1.5M in Q3 2025 (management also cited ~$1.55M), down ~$595k YOY (Q3 2024: $2.1M); YTD slightly under $5M
• EPS: -$0.15 per share in Q3 2025 (net loss $965k) vs -$0.39 in Q3 2024; 9M 2025 net loss $2.9M or -$0.50 per share vs -$1.69 prior year
• Gross Margin: 77% in Q3 2025, compared to 78% in Q3 2024; management notes software gross margins of 90%+

Guidance:

• Large banking customer renewal expected early 2026 with an anticipated $1M–$3M in revenue in Q1 2026
• PortalGuard v7 targeted for general availability late Q1 or early Q2 2026
• EcoID III launched with initial defense/government volume and targeted adoption in regulated industries (financial services, education, healthcare)
• Company expects a strong finish to 2025 driven by partner-led pipeline growth
• Post-quarter warrant exercises generated ~ $2.9M in net proceeds to extend runway

Business Commentary:

* Revenue Variability and Large Customer Orders: - BIO-key International reported Q3 2025 revenue of $1.55 million, roughly in line with the first two quarters of 2025, but down from $2.1 million in Q3 2024. - The decrease was largely due to quarter-to-quarter variability in larger customer orders, particularly from a long-time banking customer and a defense industry customer.

• Defense and Banking Market Growth:
  
• BIO-key is witnessing growth in the defense and banking sectors, with new deployments by significant global defense agencies and expansion in banking solutions.

• This growth is driven by increased defense spending and a focus on cyber resiliency, with BIO-key positioned to capitalize on these trends.

• Operating Expense Reduction and Cash Liquidity:

• The company has reduced operating expenses by over 10% through the first nine months of 2025, supporting a reduction in breakeven levels and a move towards positive cash flow and profitability.

• This was achieved by expanding the global reach and suite of solutions while managing costs effectively.

• Focal Points for Year-End and Future Growth:

• BIO-key anticipates a strong close to 2025, focusing on channel sales efforts in Europe, Middle East, and Africa.
• Upcoming releases include a significant update to the PortalGuard identity platform and the introduction of the EcoID III fingerprint scanner, providing advanced hardware to support BIO-key's software-driven model.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly cited strengthened pipeline and partner momentum (“pipeline now is pretty solid”), cost reductions (operating expenses down >10% YTD; Q3 opex down 8%), successful product launches (EcoID III, PortalGuard v7 timeline) and post-quarter financing (~$2.9M net) as reasons for confidence and an optimistic outlook.

Q&A:

• Question from Dan Khamis (Private Investor): Was the Bank of Egypt win recurring licenses or permanent licenses, and do you expect similar revenue from that client in 2026?
  Response: CEO: It was an initial deployment with expected expansion (possibly in Q4) and continued growth into 2026.

• Question from Unknown Attendee (Unidentified): Does partnering with Raya mean margins are lower on that project?
  Response: CEO: No—software gross margins remain 90%+; partners serve as force multipliers to access local markets.

• Question from Unknown Attendee (Unidentified): The Bank of Egypt first step handled employees; is non-employee (CIAM) expansion a 2027 target?
  Response: CEO: Employee expansion may occur this year; CIAM/customer expansion is expected to begin in 2026.

• Question from Unknown Attendee (Unidentified): Is the recent Middle East defense contract similar in scale to your largest defense ministry engagement?
  Response: CEO: It's even bigger with substantial expansion potential and long-tail, sticky characteristics.

• Question from Unknown Attendee (Unidentified): What is your current ARR/recurring revenue run rate?
  Response: CEO: ARR is growing and is estimated at roughly $6M–$7M, with single-digit churn.

• Question from Unknown Attendee (Unidentified): Is the EcoID III priced lower than EcoID II or competing at a different quality tier?
  Response: CEO: EcoID III competes with higher-quality devices, adds on-device encryption and liveness detection, list ~$49.99 (EcoID II was ~$44.99 without those features); initial order ~7.5k–10k units.

• Question from Unknown Attendee (Unidentified): Any update on the boomerang stock asset value after the 9-month period?
  Response: CEO: Will evaluate during the 2025 audit; believes value appears intact but provided no specifics.

• Question from Unknown Attendee (Unidentified): What explains the recent extreme trading volume in the stock?
  Response: CEO: No definitive explanation—announcements drive volume and management believes the company is undervalued, but cannot pinpoint causes for singular high-volume days.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): What led you to feel confident to install formal guidance parameters, and will you provide a formal guidance framework for 2026 next call?
  Response: CEO: Confidence stems from a solid, more visible pipeline and partner network; will provide formal guidance when predictability improves.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): Is the large renewal expected in 1Q 2026 still on track?
  Response: CEO: Yes, still on track.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): Did the recent U.S. government shutdown affect your Q4 operations or growth initiatives?
  Response: CEO: No measurable impact.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): Beyond the 1Q renewal, are there other major renewals or expansion opportunities in 2026 we should watch?
  Response: CEO: Yes—multiple renewals and expansions across banking, defense and healthcare and significant partner-driven opportunities are expected.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): Can you update the status and structure of the Channel Alliance Program (CAP) and partner exclusivity?
  Response: CEO: CAP is expanding with distributors, MSPs, MSSPs and resellers; focus is on high-quality partners—some are exclusive but most sell broader solutions; BIO-key's biometric differentiation often makes partners favor us.

• Question from Jack Vander Aarde (Maxim Group LLC, Research Division): Do you expect further operating expense reductions and is breakeven on the horizon?
  Response: CFO/CEO: Management continually evaluates costs (rent reductions, etc.); they see breakeven achievable given strong gross margins (blended ~70%–80%) and scalable partner-based support.

• Question from Dan Khamis (Private Investor): Why are revenues flat YoY—was it loss of swivel revenue or another cause?
  Response: CEO: Flatness driven by timing and one-time large Q3 2024 orders (catch-up) plus earlier product transition delays; management views issues as timing rather than structural.

• Question from Unknown Attendee (Unidentified): With ~$3M in cash and insider buying, why should someone invest $25k in BKY?
  Response: CFO: Believes the company is fundamentally undervalued, acknowledges financing created overhang, and expects value to be unlocked as operations progress.

Contradiction Point 1

Defense Ministry Contracts and Revenue Impact

It involves the expected impact of defense ministry contracts on company revenue, which is crucial for investor expectations.

Can you share your current ARR? - Unknown Attendee (Private Investor)

2025Q3: Our defense ministry contracts have ramped nicely. We've, again, mentioned that we're at multimillion dollars, and they still have a lot of room to grow. - Michael DePasquale(CEO)

What does meaningful contract activity in the first half of next year mean for cybersecurity in Europe? - Dan Thomas (Private Investor)

2025Q2: We have contracts that we've closed already this quarter and late last quarter and this quarter that we really just can't discuss. We provide not only an MFA, but an identity and access management platform with PortalGuard. - Michael W. DePasquale(CEO)

Contradiction Point 2

Operating Expenses and Revenue Recovery

It highlights differing expectations regarding operating expenses and revenue recovery, which are critical for assessing the company's financial health.

With the recent bank and defense wins, what is your current ARR (recurring revenue)? - Unknown Attendee (Private Investor)

2025Q3: Our ARR is growing. I would say we certainly are in the because you have to back out when you look at our total number includes hardware and software. But I think our ARR base, including renewals on our traditional contracts, right, the traditional PortalGuard business that we purchased probably are in the $6 million to $7 million range right now. - Michael DePasquale(CEO)

With increased cybersecurity and R&D costs, will the recent trend of reduced operating expenses reverse? - Dan Thomas (Private Investor)

2025Q2: No. The answer to that question is we had a blip in the second quarter due to a few things. Number one, for those events is one element. And I think we believe that the expense run rate that we started the year at from will pretty much be the way we proceed through the third and fourth quarter. So again, it was about a $300,000 blip in Q2. - Michael W. DePasquale(CEO)

Contradiction Point 3

Recurring Revenue and ARR Growth

It involves the company's recurring revenue and ARR growth, which are critical indicators for investors, and there are differences in the reported figures and growth expectations.

Given the recent bank and defense wins, what is your current ARR (Annual Recurring Revenue)? - Unknown Attendee (Private Investor)

2025Q3: Our ARR is growing. I would say we certainly are in the because you have to back out when you look at our total number includes hardware and software. But I think our ARR base, including renewals on our traditional contracts, right, the traditional PortalGuard business that we purchased probably are in the $6 million to $7 million range right now. - Michael DePasquale(CEO)

Are there any large renewals or repeat orders expected in Q2 or for the remainder of the year? - Jack Vander Aarde (Maxim Group LLC, Research Division)

2025Q1: We expect to continue sequential growth, with a strong pipeline of opportunities, including large deals. Our goal is to grow the business sequentially throughout the year. - Michael DePasquale(CEO)

Contradiction Point 4

Impact of U.S. Government Shutdown

It involves the impact of the U.S. government shutdown on the company's business operations and growth initiatives, which could affect investor expectations.

Besides the Q1 2026 renewal, are there any other major upcoming renewals or expansion opportunities expected during the year? - Jack Vander Aarde (Maxim Group LLC, Research Division)

2025Q3: Not at all. Not at all. We didn't see any impact at all. Typically, we're flying way above that in the context of security. - Michael DePasquale(CEO)

Did the recent government shutdown impact your business operations? - Jack Vander Aarde (Maxim Group LLC, Research Division)

2025Q1: Well, we couldn't access the office, so a few of these folks, and I were actually working in the basement, so we could access the network, which has been -- has been productive. We're actually getting a lot done. - Michael DePasquale(CEO)

Contradiction Point 5

Revenue Growth Expectations

It involves changing expectations regarding revenue growth, which is a critical indicator for investors.

Given the recent wins in banking and defense, can you share your current ARR and recurring revenue? - Unknown Attendee (Private Investor)

2025Q3: Our ARR is growing. I would say we certainly are in the because you have to back out when you look at our total number includes hardware and software. But I think our ARR base, including renewals on our traditional contracts, right, the traditional PortalGuard business that we purchased probably are in the $6 million to $7 million range right now. - Michael DePasquale(CEO)

What caused the change in your 2024 revenue outlook from flat or growth compared to 2023? - Jack Vander Aarde (Maxim Group)

2024Q4: Based on current expectations, we expect to finish 2024 with overall revenue either flat or with growth compared to 2023. - Michael DePasquale(CEO)