Earnings Call: Q1 2020

Jan 30, 2020

Good day, and welcome to the Mitek Systems First Quarter Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to the conference over to Todd Curley, MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon, and welcome to Mitek first quarter fiscal 2020 earnings conference call. With me on today's call are Mitek's CEO, Max Carnekia and CFO, Jeff Davison. 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 first quarter fiscal 2020 financial results. That release is available on the company's website at mytechsystems.com. This call is being broadcast live over the internet for all interested parties and the webcast 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 call are made as of today, January 31, 2020, 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 will be discussing certain non GAAP financial measures. Today's earnings release and the related current report on Form 8 K'd 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, and good afternoon, everyone. Thank you for joining us today. Jumping right in, we delivered another record quarter with 1st quarter revenue of $22,100,000, representing growth of 25% year over year. We also generated non GAAP net income of and cash flow from operations of $5,200,000. As we continue to expand partnerships with our existing Gig Economy And Marketplace segments. We also continue to experience growth from our highly profitable deposit product line as its adoption and utilization continues to increase. Before I tell you about some of the key initiatives this quarter, We said we would keep you up to date on the patent litigation surrounding USAA, but there is a lot of detail that is somewhat complex, so please pay close attention. Let me start with the that all relate to an image auto capture feature on a mobile device. Before the trial, Wells Fargo requested that the US Patent Office perform an additional review of all 4 patents. Subsequently USAA dropped 2 of the 4 patents from their lawsuit. At trial, a jury in the Eastern District of Texas found that Wells Fargo infringed at least 1 of the 2 remaining patents, but did not specify which. Wells Fargo will likely appeal the decision that process could take 18 months or more. Patent office agreed to review 3 of the 4 patents. It is important to understand that the standard the US patent office uses in determining to review patents is that they must believe that So the patent office believes at least one of the claims in each of the 3 patents they will review is invalid. The patent office must complete their review within 12 months. The Patent Office rejected Wells Fargo's request to review the 4th patent. The rejection does not, however, prohibit Mitek or any other party other than Wells Fargo from requesting a review of this patent with additional information. If the patent office invalidates the 2 patents that issue before the end of the appeals process, then Wells Fargo would not have infringed as the patents would be invalid. Alternatively, if 1 or some of the claims are invalidated, the Federal Appeals Court could decide to remand the case for retrial since the jury did not specify which claim or claims of the 2 patents was infringed. Of course, none of this matters if the appeals court overturns the entire judgment on appeal. Separately, Mitek filed an action against USAA on the same 4 patents in California seeking a declaratory judgment from the do not infringe on any USAA patents. We view the DJ action as an important step to provide certainty to our customers concerning the use of our technology and we intend to vigorously defend their use of our product. Lastly, USAA filed the 2nd lawsuit against Wells Fargo, which originally involved 5 USAA patents related to remote deposit solution. In that litigation, USAA dropped 2 of the patents and the judge in the case found that one of the remaining 3 patents was invalid. USAA won a jury verdict in January on the remaining 2 patents. It is our understanding that no Mitek product was accused of infringing either of the 2 patents in question as litigation involved broad banking processes and not Mitek's specific mobile deposit features. We believe that Wells Fargo will which is our outstanding first quarter performance. In the first quarter, our identity verification solutions continue to gain traction with our transactional SaaS revenue and transactions both growing 39% year over year. Mobile VERIFI, our industry leading product continues to be adopted by partners and customers of all sizes around the world. Our customers globally represent 100 of the world's best known brands and bank Our continued customer acquisition as well as our expansion with our existing customers underscores the significant need for identity verification and its essential use case, which is to enable businesses to onboard more good customers faster, a value proposition that Mitek centers around. 1 of our newest customers is HSBC USA. HSBC has corporate partnerships with large multinational firms and therefore needs to enable banking for foreign nationals living in the US working for these companies. Their current new account onboarding process is highly manual often requiring a video chat with an HSBC customer service representative or an in branch visit. Applications are also required esign and account agreement to complete the process. HSBC will be streamlining and automating this process by leveraging Mitek's mobile verify with face compare applicants can now capture their supported identity documents at the time of e signature, along with a selfie image for identity verification. Customers no longer required to go to a physical branch. We are thrilled to work with our partners to enable more use cases just like this. Also in the quarter, we identity verification in multiple use cases for providing this capability to over a dozen countries in Europe. Identity verification is an essential step to establishing trust in a digital world where customers relationships are being created without ever remain unchallenged. Our relentless quest for customer success is validated through expanded partnerships and use cases and delivered through high touch customer engagements We continue to innovate in fiscal 2020 with ongoing investments to deliver the world's leading most accurate and most stable identity verification solution. Mobile verified delivers against all measurements of performance, acceptance, availability, speed and assurance, and our professional services are best in class. As such, our proven track record of success continues to grow as we look to further expand We remain the clear market leader with over 6500 financial institutions using the deposit products. Excuse me. Retail banks are investing significant resources to drive customers to this digital channel. And as they do, mobile check deposits continues to increase. Recently, we partnered with Cornerstone Advisors to release the 2020 mobile deposit benchmark report, which ranks the top 20 U. S. Banks on their mobile deposit use experience. The report validates that depositing a check is one of the most important mobile banking features available more than half of mobile banking customers use their mobile banking app for check deposit in the past year and mobile the most prevalent deposit method for millennials and gen xers. 2 thirds of respondents between the ages of 18 24 said that mobile deposit fabric of mobile banking and we're excited about the significant opportunities ahead as we work to expand adoption into new verticals and add capabilities for existing customers. In closing, we're pleased with our results, which include record revenue and significantly improved profitability. The Mitek workforce should take pride in how we deliver differentiated value to our customers. 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 all Mitek's 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 for questions. Over to you, Jeff. Thanks Max and thank you everyone for joining us this afternoon. Let's start with the Q1 revenue and operating results. For the first quarter of fiscal 2020, Mitek generated record Q1 revenue of $22,100,000, a 25% increase year over year. Software and hardware revenue was $11,500,000, an increase of 15% year over of 93% for the quarter. Services and other revenue, which includes transactional sales revenue, maintenance and consulting services, was $10,600,000 for the quarter, an increase of 37 percent over Q1 last year. This increase is due to growth transactional SaaS revenue, which increased 39 percent year over year to $6,100,000, and growth in maintenance revenue for deposit solutions. For Q1 twenty twenty, deposits revenue increased 23 percent to $14,700,000 and revenue for identity verification increased 28 percent to $7,400,000. Gross margin on services and other revenue was 80% for the quarter, up from 74% in Q1 last year. Combined gross margin for the quarter was 87%, up from 84% in Q1 last year. Total GAAP operating expenses, including cost of revenue, were $21,800,000 compared to $22,200,000 in Q1 last year. This decrease in total expenses results of the restructuring announced in July of 2019 and a decline in stock based compensation and acquisition related costs, as well as expenses related to These decreases were largely offset by increased expenses for investments As a reminder, in June 2019, we recorded a restructuring charge of $3,200,000 related to a reduction of 25 personnel in Paris. We estimated this reduction to be approximately 2,500,000 of annualized expense. We are realizing the benefits of this restructuring action which has allowed us to make investments for our identity business the quarter were $7,300,000 compared to $7,200,000 a year ago. R and D expenses were $4,600,000 compared to $4,500,000 last year, and our G and A expenses were $5,300,000 compared to $5,800,000 a year ago. The decrease in G and A expenses is primarily due to the previously mentioned item. GAAP net income for the quarter was $560,000 Our diluted share count was 41,800,000 shares compared to 38,200,000 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 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 Q1 increased to $5,000,000 or $0.12 per diluted share compared to $1,000,000 or $0.03 a year ago. In Q1, our non GAAP adjustments included $2,300,000 of stock comp expense, $1,600,000 of acquisition related costs and expenses and $473,000 of litigation expenses. Turning to the balance sheet, we generated 5,200,000 in cash flow from operations during the quarter, bringing our total cash and investments to $39,900,000 at December 31, 2019. Our accounts receivable balance of $20,900,000 represents a DSO of 58 days. Now moving to guidance for the remainder of fiscal 2020. We are reiterating our previously provided full year revenue guidance for our fiscal year ending September 30, 2020. We expect full year total revenue to be between $98,000,000 to $102,000,000 which would represent revenue growth of approximately 16% to 21% year over year. We continue to expect our non For Q2 of fiscal 2020, we expect total revenue of between $23,000,000 $23,500,000, representing growth of between 15% to 18% year over year. We expect total expenses including cost of revenue for Q2 and excluding our acquisition related costs and expenses for Q2 be approximately $1,600,000 and stock comp expense to be approximately $2,600,000. Operator, that concludes our prepared remarks. The first question will come from Mike Grondahl with Northland Securities. Please go ahead with your question. Hey, thanks guys and congratulations on the progress. We saw big U. S. Bank kind of do a promotion on mobile deposit in December January. Do you think that had any effect driving new business or is that anything you see through through to? Yeah. Hey, Mike. Thanks for the Thanks for the shout out. We see a lot of the banks, not just the big banks, but really many of the institutions running programs to try to drive more of that check traffic to the mobile the mobile channel. And the obvious reasons are there's a tremendous cost savings for them, right? So there's a hard dollar expense savings, but there's then also the reputational element of becoming more modern and relevant as a digital institution. Back to your question, those things happen on an ongoing basis and there's not direct cause and effect that would happen in quarter or maybe even within a year, just the way that consumption happens with the transactions in that side of our business. Got it. And then any updated thoughts on pricing for mobile check deposit or or any success you've had there recently? Yes. I want to be a little careful here how we how we advertise this. But I think in many of these calls, we've been forthright in identifying that we believe that we, have a dominant market position We have a unique offering that provides value to our customers that they can't get elsewhere for depositing checks using a mobile device and that historically, maybe we have not been standing as strong and tall behind that value as we should. Over the course of the last year, we've taken steps to start to move that our pricing power and move those prices in the northward direction. Some of those conversations have been difficult and challenging, but we haven't backed down. And so I think you'll start to you probably already started to see some of that in our results and I don't think you'll see anything radical. It's not a doubling or a tripling of the price, but you'll definitely see us continue to want to establish fair value for what we're delivering. Good. Yeah. I would encourage you to do that for sure. I think you deserve it. Thanks guys. Thank you. The next question will come from Baja Three with William Blair. Please go ahead with your question. Hey guys. This is Camille O'Neil Clark on for Bhavan Suri. Congrats on a solid growth in the quarter. I just want to ask if you're seeing anything, any changes on the competitive front specifically have you seen any changes in win rates since the November Wells Fargo ruling? And are you seeing any hesitance to buy given this new January ruling as well? Thanks. So Camille, I assume your question is down the deposit side of the business. Is that where that's coming from? That's right. Yes. So no, I don't think we've seen any change in competitive dynamic on that side of our business whatsoever. The DJ action that we spoke of earlier in the prepared remarks here and that we've talked about going all the way back to the beginning of November. I think it's being interpreted by the banking industry, the way we intended and wanted it to be, which is it's the shield and the sword. We are out there actively, very actively protecting and demonstrating to our customers that we invented this technology that we only patents and that we will defend and put our money where our mouth is when it comes to that. And I believe generally what we're hearing back from customers, both those large banking core service providers as well as the banks themselves is they recognize that this is an industry wide issue and it's not a Mitek issue and that we are were out there with the sword and the shield for the industry itself. No change in the competitive dynamic there. Alright. It's great to hear. Thank you. And if I could just follow-up, in the past you've talked about there being dozens of use cases for your products that some financial institution customers Can you provide some color around what is the typical size of the initial contract and, fall on growth rates at these customers? Thanks. Yeah. I'll try to take that on. It's difficult. I don't think there's a one size fits all answer. It does depend on the institution. It depends on geographically who the regulators are. It depends on how they can actually absorb. But generally, what happens is there's there's an implementation period and it takes some time for them not just implement our solution, but to get it within the flow of if we use a use case of a new account opening or onboarding journey for a new customer. That's a month to quarter's kind of experience. And towards the tail end of that, when they've got unit testing and system testing underway, they're typically doing a controlled environment that may only friends and family, it may only be their own their own employees where the volumes are typically very low. And then they're rolling that out, whether it's into different geographies in the United States that may be a region by region state by state thing, we watch those we typically watch transaction volumes and the relating revenue start to grow in step. So it's a gradual, but building kind of experience. I don't know, Jeff, if you add anything to that. No, I think it's just a reminder that Since this is so early stage, it's early stage with our customers. And so the opportunities often start proof of concept pilot and then grow from there. So really estimating an initial deal size, they all start small. Yeah, and over time get much, much bigger. Thank you. We'll take the next question from Mark Schappel with Benchmark. Please go ahead with your question. Hi, thank you for taking my question and a nice job on the quarter. Max, starting off with a couple of questions on the jury award, with respect to that, do those rulings have any impact on the use of your mobile deposit offering? It does not. So the only parties affected so far have been Wells Fargo and USAA nobody else, no other banks have been involved in that. And, have you seen any change in your customers buying behavior on the ID side of your business as a result of the jury award? Not at all. There's been no bleed over We've spent a good amount of time with you guys, with our shareholders, obviously with customers and our partners, make and our employees us making sure that we're creating as much clarity as possible in a situation that's pretty complicated as you heard in the prepared remarks. But that's the noise level on the identity side of the business has been close to 0. Okay, thanks. And then You came in with a particularly strong quarter, granted it's Q1, not raising your guidance. Was that, just, because it's so early and just trying to be conservative? I'd say a little bit of both. It's early on in the year It's a good strong quarter. It's 25%. There's still a lot for us to do. Over the next three quarters, get into the range we're in. So by no means are we looking at a slam dunk year for that guidance? We set a good ambitious number there and we're determined to go hit it, but no point in raising it right now. Okay, great. And then, Jeff, recently the company put place a buyback program, any update there? Yes. So if you actually looked at the timing of that buyback, we announced it right as we were heading into a blackout an insider trading perspective. So, you know, the board approved that December 17th, I think. And you know, we have a good insider rules that we follow and so we couldn't actually execute it on it up to date so far. Obviously, we'll report in our quarterly queues any activity that occurs under the buyback. Great, thanks. That's all for me. Mark? Thank you for the question. The next question will come from Alan Pee with National Securities Corp. Please go ahead. Hi. Just following up on the patent legal side. I'm and I'm this is I'm not a lawyer, but can you help me understand if if you're trying to get a judgment that your patents are not infringing, is there any issue that the court could say that you're basically asking for the same thing that that's being handled in another court. So, you know, you can't get tried for, like, the same type of thing. I may be saying it wrong, but I think you know what I'm kinda saying. Yeah. The the the declaratory relief action, often referring to it in shorthand as a DJ action is basically us asking a federal court in this case in the state of California to provide a judgment regarding rights relative to these patents without ordering any damages or actions. Right? So it just clears the deck and creates clarity for our customers around their rights to use and that our patents are prior art. I'm not a lawyer either. And so I don't think I'm in a position to turn around and answer your question with any with any confidence. So I'm gonna hold off and not do that. Okay. Thank you. And then if if I look at the identity segment, if if that was more like standalone, how how do you think about what revenue, quarterly revenue run rate it turns profitable and at maybe what revenue run rate you get to kind of what your target margins are operating margins for the segment and and what would those margins be? Yeah. So I'm gonna I'm gonna let Jeff answer the specifics there, but Alan, you know, just to put a top cap on it, all of what you're asking is very controllable. Today, we are making very conscious and, very intentional investments in the identity business, it's a cash consumer and we're making those investments because this market is very big, very fast growing very valuable. It's an intractable problem for customers in its very early stages. And so we want to be a leader there. We believe we're a leader but we want to be a leader 2 to 3 years from now when the market is really big. So I'll let Jeff talk to what our models indicate where this should go. Talk to or not talk to us. We don't really give a lot of guidance on our product line forecasting. Alan, echo exactly what Max said, right? We're making investments and at any time, you can always pull that back. As we look at that product group, I look forward if you're thinking we can continue to grow, which we hope to grow at rates that we're growing at over the next few years. And as you play that forward, the only thing we've really shared is that we we anticipate we can see that product group, turn the corner to profitability somewhere out there, probably around the end of 2021. And so, you know, you go out and model those at a revenue growth rate similar to what we're seeing, I think you get an idea of kind of the size of the business that we would be at then. And the picture is over time, you're going to see gradual improvements in the gross margin line as you're able to leverage the SaaS model, the cloud model, cost model. And then we perform agent services. We'll continue to perform agent review services Over time, though, more and more transactions will be able to be handled via the auto system. So that will improve over time as well. And then the cost benefit you get below is really getting leverage out of your selling teams, your go to market and less investment in G and A and our scale, leverage and scale. So hopefully that helps you with your question. Yes, that's great. Thank you very much. And then maybe just finally there. Do when we think about the identity identity segment, do It should we be thinking of it similar to the kind of mobile deposit where you have this large defensible mode something that's protecting you, or or is it just that it's a a very large market that's early and and you you have a a good solution that's out there, but Is there a barrier to others, you know, coming up, you know, it being becoming much more competitive? I'll take that out of the gate here. It doesn't have a barrier like we have on the mobile deposit. I mean, mobile deposit you know, it's a the characteristics of the market are completely different, right. You're first off, you're dealing with checks, which are declining over years. So the population of the addressable population is declining. So that's completely different. And we work through a network of processors, who we have long term relationships with, and we have patents. So there's a pretty good move there. Whereas you go to the identity space, that's an emerging market. There's not a lot of IP that's protected out there. There's some. But not a lot of IP that's protected, and everybody's figuring it out. So that market's completely different with, I don't know that there's there. It's about being the most stable company, being a leader in the space, being first with the features, and then actually you know, delivering to your customers and earning their repeat business, which is where I think we focus our efforts and try to win. I don't know if you have more on map packs. Alan, who do you like in the Super Bowl this Sunday? I I just I'm the wrong person. Sorry. Okay. Well, thank thank you so much. I appreciate it. You got it, Alan. Thank you. Next question will come from Darren Oftahi with Roth Capital Partners. Please go ahead with your question. Hey guys, thanks for taking my questions. A couple if I may. First on the deposit. Thanks for giving that detail. Jeff, I think you said the revenue is $14,700,000 and that grew 23%. Is that correct? Yes. Would you try to indulge what unit growth flows relative to that revenue growth? That's we don't share that because that's not exactly how it lines up. So the revenue growth Remember, those transactions are blocks that are sold upfront. So it's really not associated with the unit used in the period. What I can tell you about what was used in the period is it's pretty consistent to what we've been seeing. It's in the teens. Got it. That's that's helpful. On your transactional SaaS, I just want before that. Wanna clarify, did you say ID was 7,400,000 revenue, and that was up. What was the percentage in the year on year? That one was it was 7.4% and I think it's 28%. Got it. Okay. I just want to make sure my math is correct. On the transactional SaaS, that grew 39%. But on a dollar basis, I think, sequentially, that stepped down a little bit, in Q1. And I I know looking back, that was down, maybe couple of years ago a little bit. Anything seasonal in nature with any particular clients or anything you would kinda call out as to why that that was a step down because I feel like it's been continuously growing the last probably 8 or 9 quarters. Yes. So there was a slight step down there, a couple of $100,000 from the last quarter. The thing to keep in mind with that is it's transactional. So it's always, subject to fluctuation based on whatever is going on in the customer base. So obviously, seasonality can impact that, which it did in the quarter. We had some customers with seasonality that was down. We actually had a couple customers, through some Spanish partners. So that'd be a couple Latin American, I believe they're in Latin America. Customers that actually churned, not significant, but small enough that I noticed it. And then you've just got the different customers that for one reason or another, they're seasonally up or seasonally down. And that could be due to the volume in their business or the volume that they're directing to mobile verification. So, they may be turning on different sectors or turning off different sectors, which I think we've talked with you before in the past. Geographies and such like that. So that's basically what's going on there. Overall, we look for that number to continue to grow We're enthused about the identity business and everything we're doing now is in the cloud, which we're thrilled with, except for Spain, of course. And the thing about that business is we're adding customers. They're going live. They're getting benefit from this. And then there's always going to be a little bit of this movement in the network. So hope that explains it. Yeah. Then that's great. Just two quick ones for me. Lastly, the profit margin, I think, was 22 a half percent in the quarter. This is typically your, seasonally weakest quarter. I'm just historically, it has been. I'm just kinda kinda curious why you kept that 20% to 22% guidance. And if you do keeping that like where is the marginal OpEx gonna come from, kind of where you sit today? I think for the quarter, we're actually 21%. The guidance is 20 to 22. And, you know, we've invested in the first quarter. And so, you know, as I look throughout the rest of the year. It's probably going to be right around there, up or down slightly each quarter through the end of the year. Probably Q4 will be the strongest. But, the reductions at A2IA really did let us make some investments in the identity group. And then if you look back last year and look at those non GAAP adjustments that we had, that Omen, I don't want to call him nonsense, but all the things we had to spend money on the trend, the process last year in that, there was quite operating elements. So not operating elements, not having those has been very helpful too. So, I'm really happy with where the margins came out for the quarter. And I think that, you know, we'll see something similar up or down a few points each quarter the rest of the year. That'll help us get to that guidance range. The thing is it's not our intention to go exceed that significantly because we think we need to invest in the ID business, which is what we're seeing. Got it. And then just, lastly, on the rationalization on the ID platforms, kinda where are you relative to kinda last quarter? Is are we sort of 3 months more or it's going to take another kind of 6 to 9 months before this is all complete? Yeah. So maybe this is Max just to to remind everybody. So back in July, we said we were going to accelerate the rationalization of some of the legacy systems both on prem and in the in the cloud that we had inherited through acquisition and some that were here natively. And so we kicked off that acceleration from a from a, just to disclaim here, we said the stuff from Spain and I car is going to take longer. So that's not incorporated in what we talked about back in July, we have subsequently accelerated and end of life and end of sales and Sunset, I think it was 3 or 4 systems. Since July, the overwhelming majority of revenue is now behind us from those systems and maybe you want to quantify that if there's anything to quantify? Yes, I think the hardware and software revenue line that you see now is probably close to plus or minus, where it's going to land until the Spanish stuff goes to the cloud, which is couple of years away. The rest of the ID business, I think it's safe to say now all of the on premise is done. And so that's in one of our cloud solutions. So we've got a few cloud solutions for ID that's where the revenue should go. And then over time, we'll be end of life ing one of those and getting down to 11 cloud solution. Yeah. But from a revenue perspective, I think we're really at the tail end. There, yeah, pretty much that. Darren, before I let you go, who do you like from the Super Bowl Sunday? I I I wouldn't know. Who do you like, Max? Come on, man. That's, you know, I don't wanna I don't wanna alienate any questions. I think being in California, we gotta go with the nighters. Yeah. I I I was kinda hoping San Diego, LA, whatever city they're in, charters would make it. But, apparently, that's not a not in the car just this this this lifetime. You know, just trying to add a little a little humanity to our call here. Thanks, guys. Alright, Gary. Take care. I'll turn it back to the speakers now for closing remarks. Is that it? That's it. Thank you, operator, and thank you, everyone. 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 event. You may now disconnect your lines.