Earnings Call: Q4 2019

Nov 7, 2019

Good day, and welcome to the Mitek Systems Fourth Quarter and Fiscal twenty nineteen Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kerley, MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon, and welcome to Mitek's fourth quarter and full year fiscal twenty nineteen earnings conference call. With me on today's call are Mitek's CEO, Max Kurnakia 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 fourth quarter and full year fiscal twenty nineteen 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 be archived on the Investor Relations page of the company's website. I want to 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 10 K and 10 Q for a complete description of these risks. Our statements on this call are made as of today, 11/07/2019, and the company undertakes no obligation to revise or publicly update 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'll be discussing certain non GAAP financial measures. Today's earnings release and related current report on Form eight K describe the differences between our non GAAP and GAAP reporting and present the reconciliation between the two 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. It gives me great pleasure to report that our fiscal year 2019 was another outstanding year for Mitek. It was also our second consecutive fiscal year with revenue record revenues for each quarter. Our solid revenue growth and increased profitability continues to be driven by both our deposits and identity product families. For fiscal twenty nineteen, we generated record revenue of $84,600,000 representing growth of 33% year over year. We also generated non GAAP net income of $17,300,000 or $0.42 per diluted share, up 57% year over year and cash flows from operations of $14,300,000 Reflecting on 2019, we remain excited by the momentum in the identity verification market, which is very large, early stage and rapidly opening up to new use cases that service the digital world. We also experienced continued growth from our highly profitable deposits product line as it continues to further penetrate the market. Relative to the identity business, I think we can all agree that the digital identity verification market is exciting, fast growing and mission critical. Identity verification is an essential step to establishing trust in a digital world where customer relationships are being created without ever physically meeting. To reference Gartner's recent market study, Nearly every component of modern life embraces digital channels and the need to corroborate the identity of customers, users, citizens, partners and employees through remote interactions continues to grow. So while the market for identity verification is still in its early days, it represents a significant opportunity for Mitek. In fiscal twenty nineteen, our identity verification solutions gained significant traction with our transactional SaaS revenue growing 63% and our SaaS transactions growing 74% year over year. Mobile Verify, our industry leading product, continues to be adopted by partners and customers of all sizes around the world. Our customers globally represent hundreds of the world's best known brands. Some of our new identity verification customers this year include Asurion, TD Ameritrade, DocuSign, Adobe, AB and AMRO, Comerica, Axos Bank, Opendoor and the list goes on. Our accelerated customer acquisition 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. One of our newest customers is Varo Money, a mobile only FDIC insured no fees banking app that is highly rated for outstanding customer service. Varo Money uses our Mobile Verify solution to secure the digital onboarding process with particular focus on ensuring that new account opening is easy, convenient and safe for their customers. Varo promises their customers happy human and helpful customer service. And as customer experience starts with the very first interaction, we are proud to deliver an identity product for Varo that meets their high standards of customer excellence. Varo is also an example of how our partnership with banks can span multiple use cases as Varo has been using our mobile deposit product for several years. This year, we also saw the benefit of a strengthened leadership team in the identity organization with new executives appointed in engineering, people operations and product management. This elevated talent will be a vital part of our growth plans going forward. As we begin fiscal twenty twenty, it is without a doubt a thrilling time to be part of the Mitek team. Building on our progress in fiscal year twenty nineteen, we will continue to deliver greater focus in our operations and investment in research and product development. We know the profile of our best prospective customers and partners and we will continue to prioritize our expertise within the Financial Services and Marketplace segments. We will also continue to deliver high touch customer engagement and best in class professional services. Innovation will also accelerate in fiscal year twenty twenty with our ongoing investments to deliver the world's leading, most accurate and most stable identity verification solution. Mitek is the only enterprise class provider in the identity category. Our standards of service remain unchallenged. Our product delivers against all measures of performance, acceptance, availability, speed, assurance, and as such, our proven track record has only strengthened. Switching to our deposit solutions business, we remain the clear market leader with over 6,500 financial institutions using our mobile deposit product. Retail banks are investing significant resources to drive customers to this digital channel and they do as they do this, mobile check deposit continues to increase. We are proud of how mobile deposit has changed financial services and become woven into the fabric of the 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. Mobile Check Deposit continues to be adopted by large impactful charities to help them ease and accelerate revenue collection. Alzheimer's Association reports that their mobile app revenue grew 57% after adding mobile check deposit. Turning our attention to USAA's continued attacks on the financial industry. As we have noted previously and included in our filings beginning in 2018, USAA has challenged many financial institutions with allegations that components of such institutions' remote check deposit solutions infringe upon certain of USAA's patents. In 2018, USAA filed two lawsuits against Wells Fargo alleging these claims. Mitek strongly believes that we have invented all of our core technology and that our products do not infringe on any USAA patents. As such, even though USAA has not sued Mitek directly for infringement of any USAA patents, on November 1, Mitek filed a complaint seeking a declaratory judgment that its automatic check image capture product does not infringe on certain patents owned by USAA. Subsequently, this week, one of the Wells Fargo lawsuits was concluded in the Eastern District Of Texas in favor of USAA with damages against Wells Fargo in the amount of $200,000,000 We believe this is an incorrect verdict. This verdict is subject to post trial motions and appeal by Wells Fargo. We intend to prove through the DJ Action that Mitek's technology does not infringe on USAA's patents. We view the DJ action as an important step to provide certainty to our customers concerning the use of our automatic check image capture technology. As this is a very complex area of intellectual property law and subject to ongoing litigation, we are limited in what information we can share publicly and therefore we'll be limiting our comments on this situation. Lastly, we also announced today the appointment of Donna Wells to our Board of Directors. Donna built a career in Silicon Valley at some of the most forward thinking companies in the region and has played an important role on our advisory board for several years. Her experience in financial services, FinTech and cloud software will be a tremendous asset in helping to guide Mitek into the next phase of growth. We're excited to welcome her to our Board of Directors. In closing, we're pleased with our fourth quarter and fiscal twenty nineteen full year results, which included record revenue and profit. It has been an active, exciting and transformational fiscal year and 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 in need of a solution that Mitek is uniquely positioned to deliver. Together, this amounts to a significant opportunity for 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 will open the call up for questions. Jeff, please go ahead. Thanks, Max, and thank you everyone for joining us this afternoon. Let's start with the Q4 revenue and operating results. For the fourth quarter of fiscal twenty nineteen, Mitek generated record revenue of $25,000,000 a 19% increase year over year. Software and hardware revenue of $14,400,000 was in line with prior year results. Within the software and hardware line, we saw continued growth in deposits revenue offset by declining software revenue from our legacy on premise ID products. We delivered strong software and hardware gross margins of 92% for the quarter. Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was $10,600,000 for the quarter, an increase of 57% over revenue of $6,800,000 in Q4 last year. This increase is due to strong growth in transactional SaaS revenue, which increased 58% year over year to $6,300,000 and growth in maintenance revenue for deposits products. Gross margin on services and other revenue was 80% for the quarter, up from 73% in Q4 last year. Combined gross margin for the quarter was 87%, which is in line with last year. Total GAAP operating expenses including cost of revenue were $20,500,000 compared to $22,400,000 in Q4 last year. This decrease in total expenses is primarily due to a one time benefit of $1,000,000 related to an insurance settlement received in the quarter, executive transition costs recognized in 2018, which did not recur this year, lower acquisition related costs and lower stock based compensation in 2019. These decreases were partially offset by increased costs related to investments in operations to grow our business. Sales and marketing expenses for the quarter were $6,500,000 compared to $5,800,000 a year ago. R and D expenses were $4,600,000 compared to $4,700,000 last year and our G and A expenses were $4,100,000 compared to $6,500,000 a year ago. The decrease in G and A expenses is primarily due to the previously mentioned items. GAAP net income for the quarter was $3,300,000 or $0.08 per diluted share. Our diluted share count was 41,600,000.0 shares compared to 39,700,000.0 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 for the company's operating results by excluding acquisition related costs and expenses, stock comp expense, litigation expenses and other one time items. Non GAAP net income for Q4 was $8,700,000 or $0.21 per diluted share. In Q4, our non GAAP adjustments included $2,300,000 of stock comp expense, $2,200,000 of acquisition related costs and expenses, $500,000 of litigation expenses and a $1,000,000 benefit related to an insurance settlement received. Now looking at results for the fiscal twenty nineteen full year. Revenue totaled $84,600,000 an increase of 33% year over year. Software and hardware revenue of $46,800,000 was up 15% over the prior year due primarily to the growth in mobile deposit and the addition of A2iA offset by the decline software revenue from our legacy on premise ID products. We maintained strong software and hardware gross margins of 92% for the year. Services and other revenue was $37,700,000 for fiscal twenty nineteen, an increase of 65% over the prior year's revenue of $22,900,000 This increase is due primarily to the addition of A2IA maintenance revenue and the growth in transactional SaaS revenues, which increased 63% to $21,400,000 SaaS transactional volumes increased 74% year over year. Services and other gross margin was 77% for the year, up from 75% last year. In terms of product contributions to total revenue for the full year, our identity products contributed approximately 33% of our total revenue, representing a very strong year over year growth rate of 25% and highlighting our momentum in the market. Keep in mind, the strong growth of our transactional SaaS revenue of 63% was partially offset by the decline in our legacy on premise identity software revenue as we wind down those on premise product lines. Our deposit products, which include mobile deposit and A2iA, comprised approximately 67 of our total revenue and grew 37% in the year, driven primarily by the addition of A2iA and growth in our mobile deposit revenue. As Mitek has acquired three European companies over the last four years, our exposure to foreign currency fluctuations has increased. This exposure is primarily related to the strength of the U. S. Dollar against the euro. In fiscal twenty nineteen, the euro declined in value by approximately 6%. Since we have approximately 25% of our revenue denominated in euros, this had a negative impact on our reported revenue of approximately $1,100,000 when compared to 2018. Naturally, we have expenses denominated in euros as well, so the natural hedge helps to minimize the impact on our operating earnings. Total GAAP operating costs and expenses for 2019 were $89,200,000 an increase of 25% compared to total operating expenses of $71,400,000 in 2018. This increase is due to the costs associated with the addition of A2iA, restructuring costs related to A2iA and the additional investments we made throughout the year to fuel our growth in the identity business. GAAP net loss for 2019 was $724,000 or a loss of $0.02 per share compared to GAAP net loss of $11,800,000 or a loss of $0.33 per share for fiscal twenty eighteen. Non GAAP net income increased 57% for the year to $17,300,000 or $0.42 per diluted share compared to non GAAP net income of $11,000,000 or $0.29 per diluted share for fiscal twenty eighteen. GAAP EPS basic and fully diluted share count was $39,300,000 for 2019. Our non GAAP EPS fully diluted share count was $41,300,000 for fiscal twenty nineteen. Stock comp expense was $9,600,000 for fiscal twenty nineteen compared to $9,000,000 for fiscal twenty eighteen. As of September 3039, our headcount was two eighty four compared to three zero eight a year ago. Turning to the balance sheet. We generated $14,300,000 in cash flow from operations during the year, bringing our total cash and investments to $34,800,000 at September 3039. Our accounts receivable balance of $14,900,000 represents a DSO of fifty four days. Now moving to guidance for fiscal twenty twenty. For our fiscal year ending 09/30/2020, 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 expect our non GAAP operating margin in fiscal twenty twenty to be between 2022%. For Q1 of fiscal twenty twenty, we expect total revenue of between $21,000,000 and $22,000,000 representing growth of between 19% to 24% year over year. We expect total expenses including cost of revenue for Q1 and excluding our non GAAP adjustments to be between $17,500,000 and $18,000,000 dollars We expect acquisition related costs and expenses for Q1 to be approximately $1,600,000 and stock comp expense to be approximately $2,500,000 Operator, that concludes our prepared remarks. Please open the line for questions. Thank you. And our first question comes from Bhavan Suri with William Blair. Hey guys, thanks for taking my question. I guess Max, maybe we'll start off and I know you're not going to comment too much on the legal stuff, but obviously there was a USA MyTech issue a few years ago and that got resolved. I think it was mutually whatever, I forget the exact terms. And so now you've obviously got USA going after 200 financial institutions. I guess I was wondering is there a question of liability to you guys? Because obviously on the mobile check deposit side they're using at some form your technology. And so I'm trying to understand what the risk of that liability coming back to you is or if it's not, if it's with the financial institutions given you guys had already resolved the issues with USAA three years ago. Just trying to understand what that could look like potentially. Yes. The matter that was resolved between USAA and Mitek, it goes back six or seven years ago and was an intellectual property and patent issue, but it was not related to what's on tap here today. What we mentioned in this earnings call and what was released in the eight ks today is really us taking the offensive action last week with the DJ looking for the judgment from the court, so that we can basically prove that Mitek's My Snap AutoCheck image capture technology does not infringe on the USAA patents. And that's our obligation and our strong feelings to vigorously protect our innovation, our IP and the rights of our end users. Probably doesn't make a lot of sense to talk beyond that. I can share with you the folks from Wells Fargo came out today with comments about yesterday's action and I'll just quote here from the note that they sent out. We believe this is an industry issue involving numerous other banks. So I think this is again kind of the battle of giants. Okay. Just to be clear, and then I'll turn over the question for the follow-up for Jeff. But to be clear, the patent issue that they are going after Wells Fargo for that you're actively defending around Mysat is different than the issue we had? That was covered in the stuff that whatever was, I can go back and look. But that's totally different than the patent concerns they had whenever it was six, seven years ago. Yes. They may touch each other and be related in some way, but it is different enough that obviously have ended up in court. Got it. Got it. And then Jeff, I just want to touch on guidance. Obviously, your growth on the SaaS side and the ID verification side was really solid this year. Obviously, MobileCheck, the deposit business helps with acquisitions. But I look at the guidance next year and it feels like given the size of the business down to growth rates, if I take out the inorganic part, I'd have thought some acceleration. I know you're shedding some businesses. So maybe if you could do the puts and takes of what's being shed plus the inorganic pieces to help us understand sort of what the apples to apples growth rate looks like for the core businesses on the mobile side and the check deposit side. So we can sort of have an understanding what that means for next year because obviously FX had an impact. So just help us understand the puts and takes for next year's guidance. Thank you. Sure. Let me see how I can piece that together to help you out. So guidance is 16% to 21% growth for next year. We shared with you last quarter on our call that we're under lifing some of the identity platforms and that, that was going to impact some of the revenue. And those were legacy systems going back several years and accumulated from multiple acquisitions. We also discontinued the product line with our French subsidiary for document readers. So those are both impacting that. And so we turn our focus to our SaaS transactions line, which for 2019 grew 63%. It's been a terrific number in some quarters this year in excess of 70%. And as that number gets bigger, you're not going to see the 70% continue, but you're going to see real steady growth rate. So we look for that line to continue to grow very healthy in excess of at least 40%, if not probably 50%. But we'll see really nice growth in that line as we continue through this. And as we get beyond shedding the revenue on these other product lines, that'll just become more clear and a bigger piece of the picture. When we look to the deposits business, that's been a really nice growing business for us between 10%, fifteen %, twenty % in 2018 above that, I believe. We added A2IA, which was a grower, but at a much lower rate. And as we've discussed, we do expect that deposits over time will slow and the growth rate will be drifting down towards 10%. But as we look into next year, we expect that deposits will still be above 10%, probably not significantly, but probably above 10%. And then just to recap on the earlier, the higher growth rate will be on the identity and the transactions line. So hopefully that helps you get a little sharpness on that. Yes. No, that's super helpful. Thank you guys. Appreciate the color. Thanks again. We'll take our next question from Mike Grondahl with Northland Capital Markets. Yes, hi, thanks. This is Michael on for Mike. Maybe first just on the sort of platform rationalization and the A2IA business, it seems like we're there on revenue, but as far as like costs on the platforms going from like seven to one, like how that progress going there? Yes, Mike, maybe just to tease us apart. So there were two on the deposits check side of things that you mentioned A2IA. They're basically a series of legacy products from A2IA that we no longer sell. So that's part of the revenue dis synergies. And then what we announced back in June around rationalizing, harmonizing the team and making some pretty painful people cuts, particularly in our French subsidiary, those expense changes were all disclosed back then. And I'm looking at Jeff here as we talk about this. I think the overall majority of that's already flown through the P and L. Yes. The restructuring charge is flowing through and we're seeing the benefit some of the benefit we saw in Q4 and we'll continue to see. Yes. On the other side of the business with Identity, as Jeff was mentioning in his prepared remarks, we did these acquisitions in Europe. We had some legacy on prem systems that were organic to Mitek. And so between some of the things we inherited through those acquisitions and some of the legacy really on prem related things, that's what we talked about back in July as far as things that we were going to accelerate the end of life we don't sell those things, but end of life and the transitioning of those customers were available. But in some situations, there was no successor product because it was not strategic to our go forward plans. So I think all of that was disclosed back then and we're seeing that run through the income statement again in the form of revenue dis synergies. Yes. And I think on the seven, we're at least two. I think we've got two done as of end of year. 100%, yes. Yes. And we'll see a couple more by the end of the year. And then as we shared last quarter, the Spanish platforms probably are two to three years out before we're done with those before we transition those over. Got it. That's helpful. And maybe on borrow money, you mentioned that sort of an expanded use case starting with deposit, but then moving into verify, if I got that right. With your current client base, is there a lot more of that opportunity going forward, do you think? Yes, I think we've got a number of examples, whether you want to call them neo banks or digital only banks or challenger banks or fintechs, the BlueVines, Axos, Varo, this BCN10, we've got these examples both in Europe and domestically where they need the identity verification because there is no branch to go in and present your documents to open an account, whether that's for a credit card, debit, checking, whatever. As they are banks, they also then need to be able to process that legacy payment method called a physical paper check. And so sometimes we end up starting with the identity verification and then they adopt the check technology. Other times, the check is in there first just because it's they need to accept the money. So yes, I think we've got a pretty consistent set of examples where that works. They aren't necessarily tied together technologically, but they're tied together through the idea that this is a new bank and they need to be able to do both these functions and we help them with both. Got it. Thanks. I'll hop back in the queue. Thanks, Mike. Ladies and gentlemen, this concludes today's question and answer session. And I will now turn it back to Todd Kerley for closing remarks. Thank you, operator, and thank you everyone for joining us today. We look forward to updating you again next quarter. This concludes today's call. Have a wonderful day. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.