Earnings Call: Q3 2020

Jul 30, 2020

Good day, and welcome to the Mitek Systems Third Quarter Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Todd Curley MKR Group. Please go ahead. Thank you, operator. Good afternoon, everyone, and welcome to Mitek's third quarter fiscal 2020 earnings conference call. With me on today's call are Mitek's CEO, Max Carnackia 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 third quarter fiscal 2020 financial results. That release is available on the company's website at Mitek systems.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I 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 filings, including our most recent 20, and the company undertakes no obligation to revise or update publicly any of the forward looking statements contained herein whether as a result of new information, future events, changes in expectations or otherwise. Additionally, throughout this call, we'd 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 Mitek's CEO, Max. Thanks, Todd. Good afternoon, everyone, and thank you for joining us today. Before I cover the highlights of our strong Q3 performance, Let me first restate our commitment to the well-being of the MyTech community during these challenging times. We continue to safely operate at full strength while working from home and applaud our global team members who remain highly effective in all aspects of our operations and are delivering on all service levels. MyTech is steadfast in our commitment to empower trust and convenience in the digital economy and we strive to ensure all businesses are able to operate safely online through our simple to use secure identity verification solution. To reference a recent Forbes article, the pandemic has put trust in remote digital onboarding center stage, and it's not just banking. Government benefits, health services, online education, dating companies, and gaming are just some of the sectors witnessing the demand for identity know your customer services. COVID 19 has also accelerated the adoption of digital banking and with it, electronic check deposit. MyTech remains the clear market leader with its remote check deposit solution, which is used by more than 7000 financial organizations, and has enabled over 4 billion electronic deposits. During this rapid shift online, Mitek is proud to provide a secure remote environment that enables digital transactions. With that, let's turn to our strong third quarter results. We delivered record revenue of $25,400,000, representing 16% growth year over year We also generated non GAAP net income of 6.8 which is up 43% year over year and cash flow from operations of $9,000,000. SaaS transactional revenue grew 42 percent year over year validating the positive momentum in the identity verification market and we continue to experience growth from our highly profitable deposits product line with consumers and businesses adoption and utilization continuing to increase. If there was ever a time when consumer usage from stimulus checks, banks continue to invest significant resources to meet the rising volume of active users in mobile and digital channels. Therefore, as anticipated, growth levels for the mobile deposit business increased this quarter. While this growth in transactions didn't immediately impact our revenue as we sell blocks of transactions in advance, this growth in usage will eventually flow through to revenue as banks expand their licensed transaction volumes faster than planned. We are proud of our mobile deposit offering and its ability to both assist people in this time of need while also providing layers of defense against fraud. Now on to identity. The COVID pandemic has changed the way we live and work forever. Financial services and online marketplaces face shifting fraud landscapes and companies and consumers that formally transacted business primarily in person have been forced to embrace a digital first approach. The need for fast and secure remote services is magnified. And regardless of where our customers were in their digital transformation journey, they are now looking to accelerate it. Digital identity verification is an essential use case in this new economy. Using it, businesses are able to quickly and accurately verify legitimate customers online, 1,000,000,000. For instance, some of our bigger gig economy customers went from being a convenience to serving as a lifeline for millions of people following stay at home orders. MyTech helped these customers meet increased demand by enabling them to onboard thousands of new applicants and safeguard their platform for convenient digital commerce. Similarly, a European customer who is a leading provider of digital identities in Europe, was able to quickly re rise to the increased demand in digital applications due to COVID 19 relief packages. Through their automated identity proofing process using mobile verify, they were able to provide secure access to critical government benefits for citizens impacted by COVID 19. These two examples highlight my tech's ability to scale as well as the short term advantage we've received from some of our customers in the current environment. MyTech's business resilience is proven and we are proud to have partnered with our customers during these challenging times. It is still impossible to predict the longer term impact We see some customers returning to normal volumes while other customers are still navigating the unknown as large swaths of the global economy are being affected. Near term, we continue to execute on our growth plan through channel expansion and continued product development. Channel partners who extend our offering into adjacent segments provided positive momentum in this quarter. One example was our product launch with the Venetian Casino And Resort where Mitek Mobile Verify is incorporated into the Agilisys RGuest Express mobile product. This solution enables hotel guests to check-in remotely and bypass the front desk and traditional check-in procedures. This innovative solution supports the customer's need to meet new social distancing requirements, while also allowing guests to skip long check-in lines. The Venetian reopened on June 4th and preliminary results from our go live have been very positive. Having this stature of a hotel as a successful first client is a critical milestone for our partnership with Agilisys as they look to be the leading provider of hospitality software to hotels, resorts, and restaurants around the world. We also signed a new partnership to address the significant opportunity in the e notary space. In response to COVID 19, many states have issued emergency measures allowing notary perform remote online notarization. At the same time, Congress is pushing to pass the new standardizations and secure notarization act. Which would authorize every fisting distancing regulations. With Mitek Mobile verify, e notary users can simply submit picture of their driver's license or other government issued ID document, along with answering a few questions to quickly determine the authenticity of the user and their identity. This will ensure that sensitive documents are only shared, signed, and notarized with verified parties. Innovation and product development are intrinsic parts of our growth plan and adoption of our face compare with Liveness detection technology has been very well received in the global markets since its launch in February. This high assurance biometric signal is an important competitive differentiator for Mitek. Another clear differentiator for Mitek is the caliber of our professional services, customer success, and support organizations. This quarter was no exception with record implementations and go lives collectively contributing to our 1 of a kind banking grade reputation. We are committed to helping our customers and partners as they adapt to recover faster and attempt to emerge from this crisis stronger. We continue to invest in talent and innovation and successfully onboard onboarded new hires across the globe through effective remote processes. In closing, we are pleased with our results, which include record revenue and significantly improved profitability. I'm proud to lead the Mitek workforce who has rallied to deliver the technology, products, and services that our customers need in value during these extraordinary times. We have the teams, the vision, the technology, and a market need of a solution that Mitek is uniquely positioned to deliver Together, this amounts to a significant opportunity for all our employees and shareholders. Now I'll turn the call over to Jeff to discuss the financial results in more detail Following Jeff's remarks, we'll open the call up for questions. Jeff, please go ahead. Thanks, Matt. And thank you everyone for joining us this afternoon. Let's start with the Q3 revenue and operating results. For the third quarter of fiscal 2020, Mitek generated record revenue of $25,400,000, a 16% increase year over year. Software and hardware revenue was $13,200,000, an increase of 11% year over year. Services and other revenue, which include transactional SaaS revenue, maintenance and consulting services, was $12,200,000 for the quarter, an increase of 22% over Q3 last year. This increase is due to growth in transactional SaaS revenue, which increased 42% year over year and 3% sequentially, to 7,600,000. During the quarter, as a result of the pandemic, we saw varied impact on customer transaction volumes and revenue. We had certain customers experience large increases in traffic, but then others with large decreases. The biggest volume swings were in March April, and began to taper off in May June. The net impact for the quarter was an increase in our transactional revenue of 3% sequentially $7,600,000. As we enter Q4, these volume increases have fallen off. For Q3 2020, deposits revenue increased 13% year over year to $16,900,000. Identity verification revenue increased 23 percent year over year to $8,500,000. We delivered strong software and hardware gross margins of 95% for the quarter. Gross margin on services and other revenue was 76% for the quarter. Total gross margin for the Total GAAP operating expenses, including cost of revenue, were $24,000,000 compared to $24,800,000 in Q3 last year. This decrease is primarily due to the $3,200,000 restructuring charge related to our Paris operations recorded in Q3 last year. And a decline in acquisition related costs and expenses. These decreases were partially offset by our continued investment in operations to grow our business and increased litigation costs. Sales and marketing expenses for the quarter were $7,800,000 compared to $6,900,000 a year ago. R and D expenses were $5,100,000 compared to $4,700,000 last year and our G and A expenses were $5,900,000 compared $5,100,000 a year ago. GAAP net income for the quarter was $1,300,000 or $0.03 per diluted share. Our diluted share count was 42,400,000 shares compared to 39,900,000 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 company's operating results by excluding acquisition related costs and expenses, stock comp expense, litigation expenses, and the related tax impacts of these items. Non GAAP net income for Q3 increased to $6,800,000 or $0.16 per diluted share compared to $4,800,000 or $0.12 per diluted share a year ago. Our non GAAP adjustments include $2,500,000 of stock comp expense $1,700,000 of acquisition related costs and expenses, $1,400,000 in cash tax difference and $1,000,000 of litigation expenses for the quarter. This was all offset by the income tax effect of pretax adjustments of 1,200,000 Turning to the balance sheet. We generated $9,000,000 in cash flow from operations during the quarter bringing our total cash and investment to $52,200,000 at June 30th. Our accounts receivable balance of $12,900,000 represents a DSO of 48 days. In closing, we are pleased with our results for the third quarter, which include record revenue and significantly improved profitability, and we look forward to continuing to deliver the valued services the Mitek provides. Operator, that concludes our prepared remarks. Please open you. And we will hear our first question from Bob Ansari from William Blair. Please go ahead. Hey. Hey, guys. Congratulations. This is a great, great set of results. Nice job given the tough tough environment. I mean, I want to touch first maybe on the identity verification side. You've obviously seen like a nice uptick in demand, especially with some of the partnerships with the e signature companies. You obviously touched on remote notary. You know, you saw DocuSign acquire Live Oak just update on those partnerships, how they're progressing? And maybe a little bit on the go to market with these partners, but significantly larger if we take DocuSign or someone like that, how is that go to market playing out for you? Could you provide such a critical service around that? So some color on that would be great. And then I have a quick follow-up. Sure. Well, thanks for that. Thanks for the props, Bhavan. Yes. The channel for us augmenting our direct selling with a channel sales, has been a big improvement, a big progression for us over the course of the last, you know, 12 to 18 months. And we've done that in a really thoughtful and, you know, very intentional way where we're not just, you know, kind of signing up any partner that raises their hand. So I think, you know, we use the example here that, that e notary, Agilisys, you mentioned the esignature guys And, you know, a lot of that is, you know, where what we do with the identity verification or the re verification can add value to a bigger process that they're sitting on top of. And e signature is a great example, right? We all use e signature all the time, but there's a there's a segment of esignature that requires a step up to a higher level of authentication, up to and including now with with the e notary. So I think you'll see that become a bigger and bigger part of our business. You know, we're investing not wildly there, but we're investing very thoughtfully there. And what we found when when we can get a partner like an Agilisys, when we get a partner like DocuSign or Adobe, you know, once we're integrated, they're able to act as that channel. And I think to your question about the enablement, you know, the enablement is just a, you know, it's a much easier lift because you're you're basically continuing to repeatably deliver that same broader application. Whether it's e signature, e notary, or in the case of Agilisys, the, you know, what they do for for hotels and, you know, basically being the the lifeblood or the backbone of of the the hotels, restaurants and casinos. Does that help? Yes, no, no, that's really helpful. Yes, I guess, and now this one is maybe for you and Jeff there. But if I look at the e signature workloads, let's assume we find the vaccine, hopefully, and we move past COVID, which I know we will at some point. And you think about the one time items, right, and so e signature for e notary reduction, it doesn't feel like that's gonna go back to paper. That makes a lot of sense. The idea of someone checking the hotel, maybe now people wanna check-in themselves as opposed to an app, because the the the self checking has been available for a while, but I didn't see traction. And then if you think about mobile check deposit, there's absolutely this traction because no one's going into banks. But when you look at sort of the idea of a one time item in terms of wrong word, but if you think about the growth rates and the benefits you're seeing, how would we think about sort of what that might look like in a normalized environment? The go to market with the as signature guys doesn't go back. Totally get that. Are there other parts of the growth we're seeing that may be returned to a more normalized fashion? And how should we think about that? Yeah. So it it's it's it's hard to predict. Right? I mean, you use some good examples. But even even with the Agilisys with the self check-in, you know, self check-in to to to avoid the contact is one element. But I think when we embarked on this relationship with Agilisys, it was really more around line busting, right, when you walk into Caesars Palace and there's four hundred people in front of you in the check and, you know, you spend 2 hours on your phone sitting there waiting to get to the front desk to be able to check-in. So that was the original kind of business case for it. I think it's just been accelerated with the contactless. But, you know, to your point, some of the things we saw in the last, you know, 4 months, you know, with the financial customers, we have PPP loans You know, we saw, we saw a ton of applications go through our customers and our partners in that regard. We use this example of for the the government services in Europe, particularly in the UK, our partner there basically is the it's the front door into getting unemployment benefit from the government of the UK. And unfortunately, you know, their volumes really spiked hard in in March, April, in May. And, you know, I would cross my fingers as much as I love to have the business. I would cross my fingers a year from now. We're talking about that level. Right. Yeah. Right? So I don't know, Jeff, did I miss anything in there? I think you hit it right on. You know, I think, Bhavan, you referred to some of the applications or uses that I think will just contribute to this becoming more of a norm for people, and it'll be a repeatable thing that you see. But there are definitely those cases in like we did see in the quarter where there were some spikes that on the way Max put it, we hopefully don't see that. People needing government services, continually. So those things go off definitely, retreat and come back down. Yeah. Yeah. And, well, it's hard to quantify. I appreciate you guys giving us the transparency. Into the puts and takes. Thanks guys. And like I said, really nice job. Congrats. And our next question will come from Micron Doll with Northland Securities. Please go ahead. Hey, guys. Congratulations on the quarter. First question is just, could you talk a little bit about the increased demand in in, mobile check deposit, just kind of the level of it. I know revenues lag a little bit, but just, you know, to what magnitude did you see? Yeah. So the both anecdotally from member banks and then the actual logs we get from, you know, the direct banking relationships and then those reseller providers, the core service providers, all indicated that you know, the the volume of checks going through the systems, you know, electronically and and based on taking pictures from the phone, went up pretty dramatically, like, serious double digits. I'm gonna let, Jeff talk a little bit to remind everybody as to how the model works there because there'll be a latency between seeing those increased volumes and then actually seeing that matriculate into revenue for us. Yeah. Mike, as you know, you understand the model for the mobile deposit the revenue will flow through later. So the banks, the partners, they purchase big tranches of mobile the transactions, they use them up and then come back. And this increased usage, there definitely was increased usage during the quarter. What we used to see is you know, I would describe to you in the lower, you know, teams closer to 10% you know, as well above that, you know, closer, you know, below 20s. So really good growth in the quarter in usage. And then that'll flow through over the next you know, multiple quarters, you know, as different banks and processors expire the the lots that they've purchased already. Sure. Sure. Can you hear me? Just to help you out there, I mean, some of the bigger banks report those stacks in their earnings calls, and we can kinda go back through their transcripts. Like, we saw the the note last week from US Bank where, you know, they had a 10% greater than 10% increase in mobile deposit checks and a 5% increase in active users of their, you know, of their, mobile banking software, their mobile banking, apps. So, I mean, that info is out there. Yeah. Sure. I wrote about it a week or so ago with what Wells Fargo said. I was just curious from from your view what you guys saw. And and, Max, what's what's the current update on pricing power? I mean, you got 7000 banks I don't think you've lost a bank customer, and yet now this product seems even in more demand. Do you have pricing power with it? Kind of where is that? Yes. I think we've reported on that pretty consistently, Mike. I mean, we've been at this now over a year. I think the team has, you know, has picked that up and and run with it. We're we're not in any way being unfair with our customers or our partners, but we're delivering a tremendous amount of value here. We've got eyes on that. We understand exactly what that value is to the banks and to the partners. And, you know, some of the some of the contracts, you know, are just being renegotiated so that they're they're more reasonable for both parties and you're starting to see that yours, you know, basically our results represent increased volumes of checks being processed through mobile app and then getting better economics in those relationships, as those checks are processed. Whether those checks are being processed mobile or whether they're being checked you know, we've got the software in the ATMs and in the horse shoes and the branches as well. So we, you know, we're prosecuting that, pricing power in each one of those else. Got it. And then maybe just lastly, I think you said you had record implementations in in mobile ID. How elevated were those? Yeah. So we, we tried to shy away from providing too many statistics about go lives and, you know, how many customers are selling because what we know, you know, from our installed base of hundreds of customers on the identity side is the biggest customer. It's very Pareto's Bretto's law, right? And, you know, the top customers generate over 50% of the revenue and It's not a it's not a volume game. It's really a quality game. So coming back to your question, there's something like 25 additional implementations through the course of the quarter, which was up probably 25%, 30% from the next best quarter we've had where somebody's actually gone live and end up in production. But that doesn't really tell the tale. The tale is, you know, Who is it? What are their volumes and how fast can they ramp once they're in production? Sure. Fair enough. Okay. Hey. Thanks, guys. We will take our next question from Darren Aftahi from Roth Capital Partners. I hope you're well. So can I just follow-up on the comment you just made in Maxo in terms of kind of quantity versus quality? How would you characterize those 25 or so additional implementations in the quarter on ID? When you say quantify, what do you mean? Well, I mean, in terms of the quality of the customer, I mean, super strong, large, they're going to generate a time transaction. You feel like there's a lot of stickiness. Oh, yeah, yeah, that's helpful. I get it. I get it. Yeah. So you'll remember if we go back to the beginning of our fiscal year, one of the things we talked about in our I think it was our November earnings call, was some of the adjustments we were making to our go to market activities in the identity business for this fiscal year. And a big part of that was bringing more focus We talked about focusing in on financial services, fintech and marketplace as the submarket segments we were after. We were really clear as to what countries you know, we were looking for customers in the UK, Netherlands, you know, Spain, that kind of thing. And then within that, we took an approach where we're really more around target accounts. So our our sales teams, our direct sellers don't have geographic tariff stories. They have target account lists where we're fishing with we're fishing with spheres. We're not fishing with nets here. So the During the over the overarching answer to your question is for the last 3 or 4 quarters, we've been very thoughtful and intentional around trying to find the largest lifetime value target accounts that are a good match for what we do. It's not to say we won't do business with a smaller company or a startup. It just means that our intention is really focused on the guys that we know we can solve their problem. They're gonna get a tremendous amount of value from a relationship with my tech identity And likewise, when they hit production, it may take a couple of quarters, but they're going to have some really good volumes. And you know, that that's a long winded way of giving the context of I'm really happy with, you know, we we got some really big names on financial services side. And some really big names on the marketplace side and some some names in fintech that, you know, we're gonna wake up 2 or 3 years from now and, you know, they'll be the they'll be the leaders that kind of dominate the market. So feel really good about it. Great. Thanks for that. So just with kind of the pull forward shift, you know, people are seeing in things like e commerce, it sort of begs the question whether COVID is present or not, like how instrumental, branches for a bank. And so with your position and and multi deposit, like, I'm just gonna curious maybe in the last 90 days. How's that kind of demeanor of, you know, banks on the ID side and working with you and maybe pipeline changes has just kind of, you know, transpired on on products that are being mortgage, shining up DDAs, etcetera. Yeah. Well, so I guess if we break this into two pieces, you know, on the mobile check deposit, you know, your good point around branches were kind of in decline before there was a thing like COVID, just demographically. And that's both domestically, and we've seen that, you know, in Europe as well. You know, there's a javelin study that came out in June of this year and, you know, moving to digital, the features that banks are using to move to digital mobile check deposit was the number one thing. So, you know, ahead of Zelle, ahead of, you know, ahead of some of these electronic peer to peer, approaches. So as much as, you know, that's a threat to us. The the peer to peer is a threat to us long term. In the short term, checks are still a financial instrument that that's being used, no doubt about it. And more and more are being deposited via the mobile app on your phone as opposed to the German US at ATM or the branch that's closed in your neighborhood, for whatever reason. So the second part of that question with identity yeah, I think what we're going through, my assessment of what we're going through in the last 3 or 4 months is, you know, the, the banks, the financial institutions, the, the fintech, that are strong and are gonna be able to survive have invested to accelerate their digital automation and transformation activities. There is though the other side of that ledger, there are a number of financial institutions that, you know, some have already, you know, some have already gone Kaput, some of them already are in some pretty tough, you know, some pretty deep water. And you know, that's not within our control, but it's certainly a function of our opportunity and a function of some of our customers. You know, if you're not gonna make it just because your business isn't sound or because you didn't move to digital fast enough, that's one less opportunity for us. Well, that's a balanced view. Thanks. And then just lastly, just any update on IP and what's going on in legal side of your business. Thanks. Hey, Darren. There's really not any material update what's going on there. We're pretty much, you know, where we were at the beginning of the quarter, waiting for the courts and the patent office. So you know, both courts in Texas and then the Patent Office has several review requests sitting there. So waiting to hear back on those and You'll share with me now. Great. Thank you. And with no further questions, I'd like to turn the call back back to Todd Curley for any additional or closing remarks. 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. And this concludes today's conference. Thank you for your participation and you may now disconnect.