Earnings Call: Q4 2020

Nov 5, 2020

Good day, and welcome to the Mitek Systems Fourth Quarter And Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Curley, MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon, and welcome to Mitek's Fourth Quarter and Full Year fiscal 2020 earnings conference call. With me on today's call are my tech's CEO, Max Carnekia, and CFO, Jeff Davidson. Before I turn the call over to Max and Jeff, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its 4th quarter and full year fiscal 2020 financial results. That release is available on the company's website at Mitek systems.com. This call is being rebroadcast live over the internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. Wanna remind everyone that on today's call, management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long term prospects and market opportunities, should be considered forward looking statements. These forward looking statements may include comments about the company's plans and expectations of future performance. Forward looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filing including our most recent ten k and ten q for a complete description of these risks. Our statements on this call are made as of today, November 5th, 2020, and the company undertakes no obligation to revise or publicly update any forward looking statements contained herein. Whether as a result of new information, future events, changes in expectations, or otherwise. Additionally, throughout this call, we'll be discussing certain non GAAP financial measures. Today's earnings release and the related current report on form 8 k describe the differences between our non GAAP and GAAP reporting. And present the reconciliation between the 2 for the periods reported in the release. With that said, I'll now turn the call over to my tech CEO, Max. Thanks, Todd. Good afternoon, everyone, and thank you for joining us today. I hope all of you and your families are staying healthy and safe. We had an incredible 4th quarter topping off another record year for Mitek. Most significantly, we surpassed $100,000,000 in total revenue This makes fiscal year 2020 our 3rd consecutive year with record revenues in each and every quarter. In fiscal 2020, we also generated record profitability. This solid financial performance continues to be driven by both our deposits and identities lines of business. For fiscal 2020, we generated record revenue of $101,300,000, representing growth of 20% year over year. We also generated record non GAAP net income of $28,600,000 or $0.67 per diluted share, up 66% year over year and cash flow from operations of $24,100,000. Reflecting on fiscal 2020 performance I would like to take a moment to acknowledge the tireless efforts of our global teams who remain committed to our customer success and to delivering on service levels despite the impact of this global pandemic. In times of adversity, values matter and I couldn't be prouder of how my technician's contributions have ensured business resilience and customer success. With COVID 19 hitting right in the middle of our fiscal year, we were challenged along with everyone else to adapt quickly to this altered environment. We were able to make the transition seamlessly and we continue to operate at full strength while working from home safely. Considering business performance, The COVID pandemic continues to expand the adoption of new technologies and accelerate digital transformation. Notably, for my tech is the rising usage of digital banking and with it, mobile check deposit. Furthermore, digital identity verification technology has emerged as an intrinsic enabler for people to access essential online services when they need the most. Digital identity verification provides a valuable source for overcoming many of the barriers associated with this digital and remote access. When implemented as part of the onboarding process, digital identity proofing provides a speed and accuracy that more manual methods cannot. For banks, COVID 19 has been a catalyst for digitization as widespread lockdowns meant in person bank branches are no longer an option for their customers. Therefore, as anticipated, our deposits businesses transaction levels continued to increase this quarter. In September, we released mobile deposit 4.8 which delivers more analysis and more insight people in their time of need. Now turning to the identity business. As stated earlier, digital identity verification is an essential use case in this new economy. By implementing our solution, enterprises can quickly and accurately verify legitimate customers online, which helps them secure their platform, mitigate root fraud, and stay compliant. Therefore, it is not surprising that adoption of identity verification as a service increased in the quarter, and several of our existing customers yielded increases in their transaction volumes. Large banks and gig enterprises favor our linked and layered approach to identity verification, which is uniquely customizable to protect against attack vectors depending on the customer's assurance requirements. Throughout fiscal 2020, we continued to sharpen our identity capabilities to ensure relevance with those vertical industries and markets requiring these higher assurance levels. The results of this increased focus can be seen in our SAS transactional revenue, which increased 36% year over year for our full year fiscal 2020. Along with this increased revenue has come new industry analyst recognition. In 2020, Gartner recognized Mitek across 4 different reports. For our advanced mobile capture workflow in the 2020 hype cycle for imaging and print services. For document centric identity proofing in their 2020 hype cycle for cloud security. For document centric identity proofing in their 2020 hype cycle for identity and access management technologies, And most recently, my tech was recognized among document centric identity proofing representative vendors for its MyTech Mobile Verify solution in Gartner's Magic Market Guide for ID proofing and affirmation. This report, in this report, Gartner forecasts that by 2022, 80 percent of organizations will be using document centric identity proofing as part of their onboarding workflows, an increase from approximately 30% today. During fiscal 2020, we continued our fast pace of product innovation, we enhanced our biometric offering with advanced live misdetection, which provides a fully automated spoof proof precise selfie match in less than one second. Customers prefer our face compare capabilities due to its impartiality to biometric bias with facial recognition, a now essential feature in this global economy. We also enhanced our proprietary barcode analysis to our automated document proofing capabilities. This feature leverages machine learning and big data resulting in faster, more accurate verification and a smooth additive layer of defense to fraud. Most recently we further advanced speed and accuracy of our identity verification workflow with the introduction of a single point near field communication solution for authenticating NFT NFC chip enabled ID documents or e documents via a mobile device. Our proprietary NFC enabled solution is centered around simplicity for users and speed and accuracy for the enterprises who use it. NFT increases the speed and accuracy of verification by authenticating users through biographical and biometric information stored in the NFC chip available in e documents, such as an e passport. Our intuitive capture technique swiftly locates the NFC chip and securely extracts the data for rapid authentication. All consumers have to do is scan their NFC enabled ID document and take a selfie to check liveness and face comparison. My Tech Technology takes care of the rest. This technology dramatically reduces abandonment rates and improves conversion rates for customers while supporting regulatory compliance requirements. The solution is a critical next step in reducing the risk of synthetic identity fraud, which is the fastest growing type of financial fraud today according to McKinsey And Company. As we continue to innovate, we remain committed to exploring all alternatives to achieve product superiority. Whether through partnership, acquisition, or increased R and D innovation. Looking ahead to fiscal 2021, we are recommitting to our on execution and our dedication to enabling trust and convenience in this digital economy. I believe we have an incredible incredible opportunities in front of us and we will navigate the pandemic in the most effective way possible to deliver against our customer's priorities and long term growth. I'm also pleased to announce that we have added a new member to our board of directors, Kim Stevenson. Kim is a technology innovator who has transformed processes at some of the industry's leading companies, including Lenovo, Intel, and IBM. She is currently a senior vice president and general manager at NetApp, a publicly traded cloud data services provider. Kim's experience in cloud software is a tremendous addition in the helping guide Mitek. We're excited to welcome her to our board of directors. Before I conclude, I wanna touch on the USAA situation. As most of you know, The 2 USAA verdicts against Wells Fargo for patent infringement related to remote deposit systems are subject to post trial motion that could overturn the rulings or result in new trials. Either way, the two cases will be subject to appeal in the US Court of Appeals for the Federal Circuit. Also, the US Patent Office is currently reviewing the validity of several of the Patent Set issue in the Wells Fargo cases. The final resolution of these issues may still be over a year away. Additionally, Mitek continues to vigorously prosecute its case declaratory relief that our products do not infringe the patent set issue in the Wells Fargo lawsuit. That case remains pending in the Eastern District of Texas. We also filed 6 petitions with the US Patent Office challenging the validity of the 4 patents at issue in the 1st Wells Fargo lawsuit and the 2 at issue in the 2nd Wells Fargo lawsuit. We expect preliminary decisions on whether those challenges will be instituted in the coming months. Lastly, USAA continued its unprecedented attack on its fellow financial institutions by filing a patent infringement lawsuit against PNC Bank, alleging infringement on 2 patent related to remote banking and mobile deposit. The patents relate to the overall process flow of remote deposit and mobile deposit and do not focus on specific techniques utilized during the process. PNC through a 3rd party partner utilizes certain Mitek software solutions as part of its mobile deposit service. The complaint does not mention any Mitek products or specific Mitek Technologies, and Mitek is not a party to the lawsuit. To my tech's knowledge, USAA is the only user of its technology and USAA does not make market sell, license, or offer any software technology than the banking industry, which it is now attacking. Processing software in its own operations and continues to rely on digital payments, platforms, and a vast network of ATMs created and maintained by the very banks USAA now seeks to profit from through their litigation efforts. MyTech on the other hand directly and through our partners provides our proprietary and award winning mobile deposit and check processing solutions to more to more than 7000 US Financial Institutions. Now more than ever, as we deal with the uncertainty of the COVID 19 pandemic, people rely on MyTech's technology for the safety and convenience it provides. While USAA attempts to profit, from an ecosystem that it neither participates in nor contributes to. Mitek has continued to innovate on behalf of our customers and consumers. During the past year, Mitek filed 6 new patent applications. 3 of these claim innovations related to the ID document authentication and 3 claim innovation in the capture and processing of mobile images. We were awarded 10 new patents during the last year. MyTech currently has 20 active patent applications and holds 67 issued patents. 36 of the patents are perimeter related to mobile check deposits 17 are preliminarily related to our ID verification and 14 related to specific techniques for digital extraction of data, which applies to all of our product lines. While the record is clear that Mitek invented mobile deposit Our success is a result not just of our own innovations, but of the trust and partnership we have built with financial institutions over the past 13 years since we first introduced the world to mobile check deposits. We look forward to our continued industry partnership and to improving the convenience and security of the digital world. In closing, we are pleased with our results, including record financial performance for both the full year and the 4th quarter Crossing the $100,000,000 revenue threshold is a significant accomplishment and an important milestone. I'm proud of the Mitek workforce who have rallied without question to deliver the technology, products, and services that our customers need and value during these unusual times. Discuss the financial results in more detail. And following Jeff's remarks, we'll open the call up to questions. Jeff, please go ahead. Thanks, Max, and thank you everyone for joining us this afternoon. Let's start with the q 4 revenue and operating results. For the fourth quarter of fiscal 2020, Mitek generated record revenue of $30,600,000, a 22% increase year over year. Software and hardware revenue was $18,000,000, an increase of 25% year over year. Services and other revenue, which includes transactional SaaS revenue may and consulting services was $12,700,000 for the quarter, an increase of 19% over Q4 last year. This increase is due to growth in transactional SaaS revenue, which increased 28% year over year to $8,100,000 for the quarter. For Q4 twenty twenty, deposits revenue increased 25 percent to $21,500,000 and identity verification revenue increased 17% to $9,100,000. We delivered strong software and hardware gross margins of 94% for the quarter. Gross margin on services and other revenue was 80% for the quarter, equal to Q4 last year. Total gross margin for the quarter was 88% up from 87% in Q4 last year. Total GAAP operating expenses, including cost of revenue, were $24,600,000 compared to $20,500,000 in Q4 last year. The increase is due to our investments in operations to grow our business and increased litigation expenses, partially offset by lower acquisition related costs and expenses. In our year end financial statements, we have reclassified our product management expenses from sales and marketing expense to research and development expenses. This reclassification is made for all periods presented to conform to Sales and marketing expenses for the quarter were 7,300,000 compared to 5,900,000 a year ago. R and D expenses were $6,100,000 compared to $5,100,000 last year and our G and A expenses were 5,900,000 compared to $4,100,000 a year ago. GAAP net income for the quarter was $5,000,000 or $0.12 per share compared to net income of 3 share count for the quarter was 43,100,000 shares compared to 41.6000000 shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non GAAP net income. We believe non GAAP net income provides a useful measure of the company's operating results by excluding acquisition related costs and expenses dotcom's expense, litigation expenses and the related tax impacts of these items. Non GAAP net income for Q4 increased 31 percent to $11,400,000 or $0.26 per diluted share compared to $8,700,000 or $0.21 per diluted share year bill. Our non GAAP adjustments include $2,400,000 of stock comp expense, $1,700,000 of acquisition related costs and expenses, and $1,200,000 of litigation expenses for the quarter. Now looking at results for the fiscal 2020 full year. Revenue totaled 101 18% over the prior year due primarily to the growth in mobile deposit, offset by lower software revenue from our legacy on premise ID products. We maintained strong software and hardware gross margins of 94 percent for the year. Services and other revenue was 47,200,000 for fiscal 2020, an increase of 25 percent over $37,700,000 in 20 19. This increase is due primarily to growth in transactional SaaS revenues, which increased 36 percent to 29,100,000. SaaS transactional volumes increased 35% year over year. Services and other gross margin was 79% for the year, up from 77% for 2019. For our fiscal year 2020, deposits revenue increased 19% to $67,700,000, driven primarily by increased consumer adoption of mobile deposit. Identity verification revenue increased 22 percent to $33,600,000, driven by 36% growth in our transactional revenue, which was partially offset by the decline in revenues for our legacy on premise solutions that are being discontinued. Keep in mind that transactional revenue was aided by COVID 19 related tailwinds spurting the transition to mobile commerce earlier this year. Total GAAP operating costs and expenses for 2020 were $92,400,000, an increase of 4% compared to total operating expenses of $89,200,000 in 20 19. This increase is due to the additional investment made throughout the year to fuel GAAP net income for 2020 was $7,800,000 or $0.18 per diluted share compared to a GAAP net loss of $724,000 a loss of $0.02 per share for fiscal 2019. Non cap net income increased 66 percent for the year to $28,600,000 or $0.67 per diluted share compared to non GAAP net income of 17,300,000 or $0.42 per diluted share for fiscal 2019. Oleg diluted share count for 2020 was $42,500,000 for both GAAP and non GAAP EPS. Stock compensation expense was consistent at $9,600,000 for fiscal 2020 as compared to fiscal 2019. As of September 30th, 2020, our headcount was 3 99 compared to 2 84 a year ago. Turning to the balance sheet. We generated $6,700,000 in cash flow from operations during the quarter and $24,100,000 for the full year. Bringing our total cash and investments to 60 $4,000,000 represents a DSO of 43 days. In closing, we are pleased with our results which included record revenue and non GAAP net income for both the quarter a $100,000,000 in annual revenue, driven by continued strong growth in both our deposits and identity verification product offerings. Operator, that concludes our prepared remarks. You. And our first question comes from Bhavan Suri with William Blair. Please go ahead. Thank you, guys. Thank you, and congrats. Really nice end to the year there. I guess I wanted to touch a little bit first on the identity verification side. Max, if you I'd love to just sort of, you know, you're seeing this business start to get enough traction and COVID's been a pretty big driver of that, right? So turning for mobile check deposit, but for mobile identity verification, you know, the the need to go in and show something for all sorts of things, loans mortgages, things like that. I'd love to understand that if you think about, providing some color, we'd love to get some color on how much of that growth do you think has been driven by COVID? And then more importantly, the durability and the sustainability of the growth in that business, because it is a nascent market. So it feels like that could accelerate or at least sustain. So I'd love to understand how you're thinking about that for the next, you know, 3 to 5 years in terms of all the drivers behind it. Yeah, it's a great question and thanks for the kind words, Bhavan. Yeah, I think the starting point there certainly is that identity not only is a relatively early stage category, I think it's a category that will continue to morph, right, as we've made this analogy to to cybersecurity as bad actors, you know, kind of find their way through, you know, different attack vectors. Those get closed, and then they go find other other attack vectors. I think we'll continue to see that with identity fraud and identity verification. We certainly got the help. You know, it was a mixed bag in the sense that we got the help of COVID that really pushed some really heavy transaction volumes in in what would have been our Q3 we also had customers that were, you know, that were hurt by COVID and their volumes went way down. But the the puts and the takes, I think, in, at least in Q3, resulted in a net positive for us in that period. And I wouldn't say we're back to, you know, kind of what we were at before. There's still a tremendous amount of uncertainty. Political uncertainty, economic uncertainty, biological uncertainty. But but I do, you know, it's hard to have great visibility over the course of the next, let's call it, 6 to 9 months. But the longer term, where you started with question about what's gonna happen in the next 2, 3, 4 years. I'm bullish about that. I'm, you know, really optimistic about what that's gonna mean for for my tech and take work positioned really well, both with our current offering. But then as I look into, you know, our strategy and our roadmap and the things we'll be doing not just with documents, but we've talked today about NFC and Liveness and face biometric, and feel, you know, feel really good about where we're gonna take this and be just because it's market driven, it's customer driven, and we've got these great customers that are providing all the sites as to what's working, what's not working, and then the ongoing changes of attack vector from the bad actors. Yeah. No. No. That's really helpful. I think just to continue down that vein, and I'll jump back in queue after this question and maybe get to the normal check deposit stuff later. But it's going to be a big market. It's a big market we all realized that this coupled with sort of this idea idea of identity management, this this futuristic thing that you and I are talking about, gonna be a pretty big market. And it feels like, you know, there's you guys and there's, you know, another scale player out there, that's very focused on KYC and other things. And then, you know, some smaller players too, how do you view the competitive nature in this market? Are you guys fixing certain areas and other guys fixing financial services and KYC type stuff? You seeing that develop, or do you think it's just kind of right now so early that that it's hard to do that? And how is the competitive environment? Yeah. I think it's, you know, any any category you know, any category period end, any market period end that's big and fast growing and is yet to be solved is a magnet competition. Yeah. While it's early days, I don't think we're, you know, I don't think we're in, you know, the 1st 10th or this, you know, we're we're about a quarter of the way through here, even some of the stuff you heard from Gartner, the Gartner report that we quoted here. And my experience, you know, having spent the better part of 2 decades Silicon Valley and watched a lot of categories kind of go through their life cycle. You know, 56 companies get formed and, you know, venture or private equity, and then there's a shakeout. Right? There there's a a fight for relevance and a fight for domination. And, you know, 3 or 4 come out the other side as as real dominant players, and that's our intention. And I think that's well underway. I think last year, if you look over the last 18 months, there's been there's been some consolidation, and I think you'll you'll continue to see that you know, the the the folks who can invest and can't really deliver effective solutions are gonna fall by the weight side. And, you know, folks like my tech that are that are improving go from strength to strength. Great. That was very helpful. Thanks guys. Congrats again. You got it. Thanks, Balan. Thank you. And as a reminder to our audience, you may And next we will go to Mike Grondahl with Northland Securities. Please go ahead. Hey. Thanks, guys. And congratulations on a $100,000,000. That's, that's pretty impressive. Mobile deposit Could you talk a little bit about what you're seeing there, you know, bank branches some are still closed. People don't like to drive up tellers as much. It really seems like the last 6 months has been ideal for mobile deposit. And and are you seeing that across your network? It it it looks like there was an acceleration in the back half of the year for mobile check revenues. Be nice to get some insight and kind of, you know, I know you don't disclose reorders, but but kind of if that's starting to pull through or not. Yes, I'll make a couple of comments and then see if Jeff wants to add. I mean, we definitely believe we're hearing from our customers and our partners that behavior of consumers banking consumers has changed. They're afraid to touch ATMs. And as you point out, there were instances of many branches being closed. And so the adoption of being able to not just deposit checks using your mobile device, but using your mobile device as the branch. You know, I'm sure if you went into any of the any of the earnings calls of the big 4 banks, US, the big 4 banks you'd hear that, you know, mobile adoption is increasing at a at a faster pace And I think we're enjoying the benefit of that. Now I think that's also then got to be balanced with the economic slowdown that's been experienced in the course 6 or 7 months, not just in the United States, but worldwide, comes with less checks being written. You know, we'll set aside the the federal the federal checks that that were issued. But, you know, on a on an ongoing basis, the the retail checks, you know, just less of them, just because there's less economic activity. Jeff, I don't know if you wanna add anything to that. Sure. Hi, Mike. You know, mobile deposit activity has been pretty positive, during COVID. And as I shared last quarter on the call, we saw, you know, we look at the usage of the checks that the banks report and the processors report. And we saw an increase in that last quarter, you know, from what previously was, you know, kind of trending downwards to the lower teams, actually pick up and be more of a 20% growth last quarter. We saw repeat of that this quarter, it's still strong usage. And so despite the pressure on, you know, the total check volume declining, we're seeing really nice growth in mobile deposit usage. So consumer adoption is definitely, you know, increased during this COVID time. And you know, when you try to translate it to our revenue, you know, you think about our revenue and how it works and we sell the large blocks upfront and they wind them down, we may have seen a little bit of that in the quarter. It's kinda hard for me to drill into it and actually assign, you know, this increase here is definitely due to COVID because the processors, they buy into large box. But, you know, the usage figures are really good, which bodes well for you know, mobile deposit revenue in the future for us as the reorders come back in. Got it. And and have you been able to get a little bit of price there too? Yeah. Mike, you know, that we've been, you know, campaigning on the idea that we've got pricing power and that we haven't gotten fair value from our partners or our customers, the better part of 18 months. I don't think that COVID, you know, we we're not opportunistic and we're not pirates and we're not trying to use COVID as as an excuse for that. This is just the ongoing, the ongoing efforts to get fair value for a really important and really valuable service whether it's at the branch, whether it's in the ATM, or whether it's, you know, on a mobile device, you know, we, we just have, by far, the best not just the best tech, the best experience, and and the best results for the for the financial institutions. And, you know, we whether from the acquisitions or some behaviors within this business over years gone by, we're just writing some wrongs that that were in contracts and we're, we're, you know, was probably a long time coming for us to, to make the right adjustments in those contracts. Got it. Got it. Good. Good to hear on both fronts there. Thanks, guys. You got it, Mike. Thanks. And, gentlemen, it appears that we have no additional questions at this time. Okay. Thank you, operator, and thank you everyone for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day. Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.