Good day, and welcome to the Mitek second quarter fiscal 2018 financial results conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli of the MKR Group. Please go ahead, sir.
Thank you, operator. Good afternoon, and welcome to Mitek's fiscal 2018 second quarter earnings conference call. With me on today's call are Mitek's Chairman and CEO, Jim DeBello, and CFO, Jeff Davison. Before I turn the call over to Jim and Jeff, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its second quarter fiscal 2018 financial results. That release is available on the company's website at miteksystems.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'd like 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 more complete description of these risks. Our statements on this call are made as of today, May 1st, 2018. 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. 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 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, Jim DeBello.
Thanks, Todd, and good afternoon, everyone. Thanks for joining us today. I'm happy to report that Mitek achieved record total revenue in our fiscal second quarter of $14.3 million, an increase of 25% year-over-year. This growth reflects the continued market momentum we've been building over the past two years for Mitek's identity verification solutions. At the same time, we've achieved our 17th consecutive quarter of profitability with non-GAAP net income of $2.1 million or $0.06 per diluted share. During the quarter, our ID SaaS transactions grew 80%. Our ID SaaS revenue grew 91%, and our overall ID business grew 109%. We secured many new enterprise customers from Mobile Verify while achieving our 2 billionth Mobile Deposit, all of which I'll talk about later in more detail.
As a result of our strong financial performance halfway through this fiscal year, we're pleased to be increasing our guidance for the full fiscal year. Jeff will provide more detail later in the call. Today, there's a rapid erosion of trust in the digital world. Trust is no longer a nice-to-have but a must-have, and Mitek's identity verification solutions are helping companies that are making trust a business priority. Here's what's new. The national narrative has definitely turned in our favor during the past 90 days. Facebook is now requiring ID verification, and CEO Mark Zuckerberg's appearance before Congress strengthened this narrative. Uber's CEO appeared on NBC's Today Show and supports identity verification and ongoing monitoring. Twitter and others claim to welcome regulation. Privacy and identity do matter. Just ask Apple's CEO, Tim Cook. Apple says it's a human right in their recent iOS update.
To ensure transparency, Facebook will begin to require the admins of popular Facebook pages and advertisers buying political or issue ads to verify their identity and location. We're glad to see that Facebook and Twitter are endorsing the Honest Ads Act to bring more transparency to social networks. However, there's a lot more to be done. We believe companies that make identity and trust the cornerstone of how they engage with their customers are going to be the ones that will thrive, not just survive. One of the opportunities before us is to leverage this national narrative and take advantage of this amazing shift. The issue of trust has broken through as one of the top concerns for leaders across every major industry. Nowhere was this more clear than at the K(NO)W Identity Conference in Washington, D.C. last March, spelled K-N-O-W.
Rattled by the latest round of high-profile breaches of customer data, executives from industries as far ranging as financial services to travel and telecommunications attended the conference in greater numbers than ever before. Clearly, this is because we've reached a tipping point. Simply put, trust is the new currency of the digital age. What's more, the industry leaders we heard from understand that the foundation of trust is identity verification, and despite all the other advances we've seen in the modern era, identity document verification is still the best path. Basically, these leaders asked, "How can we avoid being next?" Data breaches undermine the entire foundation of the digital economy. It's not a stretch to say that without trust, there can be no digital economy. The keynote speaker at the K(NO)W Identity Conference, Airbnb's global head of trust and safety, understands this better than most.
Their entire business is based on users trusting each other enough to share homes without ever having met. For Airbnb's business model to work, trust in the real world has to start with trust in the digital realm as users find each other and connect online. As the keynote speaker pointed out, the security of the company's transactions and the physical safety of the company's users depend on it. That makes identity verification the key to Airbnb's success, but it's also vital to the success of any company that does business online, which today means just about everyone. In order to ensure safe and secure transactions take place, companies need to be able to trust that people logging into their networks are legitimate users. A common method of online identity verification that you're all familiar with is knowledge-based authentication, but this method is fraught with risk.
Users answer a set of personal questions to which presumably only they know the answers. Verification depends on comparing the user's answers to a database of correct answers, and that's where the problem begins. As the onslaught of data breaches continues, these databases get hacked. Companies and consumers relying on knowledge-based answers for identity verification are increasingly vulnerable. The solution to this problem, as it's been in the physical world, is the use of physical documents issued by a trusted authority. That means government IDs. Because they're issued by recognized authorities, government-issued identity documents such as driver licenses and passports are still the strongest source of identity verification online or off. It's now a mainstream view accepted by a great many of those attending the conference that government document ID verification represents the gold standard for establishing trust.
The question is: how do we transfer the best possible form of identity verification, meaning government IDs, from the physical into the digital world? Scanning physical documents quickly and easily is not a trivial challenge. Fortunately, Mitek's Mobile Verify can get the job done by running advanced authenticity checks to verify documents. We find the fakes. Additional urgency comes in another form, stringent regulations with big penalties for non-compliance. Sweeping new data security regs are coming. It's a veritable alphabet soup. PSD2, GDPR, AMLD5, and more, leading to a scramble for compliance before they go to effect. However, along with the challenge of increased regulations comes a big opportunity.
CTOs and other corporate leaders at the conference spoke about how regulations might actually benefit their companies, and that's because while regulation may increase compliance obligations, it's also going to help protect companies against losing that most important asset of all, the trust of their customers. Viewed in this light, increased regulations can actually be seen as an endorsement of the digital economy with the potential to strengthen it overall. Mitek is well-positioned to benefit from these changes. Physical documents such as driver licenses will continue to be the cornerstone of identity verification. In other words, today and for several years to come, nothing can beat government-issued documents for establishing trust for digital transactions. We believe that Mitek's ID solutions bridge the gap between the physical and digital worlds for identity verification and are what's needed right now to keep the digital economy humming into the next decade.
For Mitek, the national narrative around the need for trust in the digital world plays in our favor as our solutions provide a proven, friendly experience and combine what you have, meaning a physical ID, with who you are, meaning a facial comparison to your ID photo through a selfie. Just as we did with Mobile Deposit, Mitek has transformed the physical process of identity verification that has worked for decades into an easy, efficient, and secure digital experience. How do we do this? Our identity verification cloud platform is continuously learning from the millions of authentic ID documents we process and the fakes that we find. We can quickly add and update new document types from around the globe, which further trains our AI platform and provides global identity coverage to our customers.
We believe that our advanced forgery detection algorithms, coupled with our large repository of fake ID images from around the world, gives us one of the most accurate and comprehensive ID proofing products for the digital channel and sets us apart from our competition. We find the fakes. As part of our plan to foster global identity coverage, we acquired a terrific company in Barcelona last October named ICAR. They're performing extremely well and broaden our geographic coverage beyond North America and Europe into Latin America. ICAR's computer vision scientists are dedicated to ongoing research and development, and by merging them with our Mitek Labs, we believe we now have one of the most powerful research and development teams in the digital identity verification industry. We continue to seek other opportunities for growth through acquisition and intend to use our strong balance sheet to grow both organically and through M&A.
Let me highlight a couple of our new and existing identity customers and the progress we made with them this quarter. One notable new customer we added is a large global provider of insurance for smartphones, tablets, and other consumer electronics. This company operates in 18 countries and has 60 offices with 25,000 employees serving 320 million consumers. They provide insurance against loss or damage for new mobile devices purchased from any of the major carriers. Previously, to ensure against fraud during enrollment, each new customer application was reviewed and identity verified manually during the onboarding process, which is expensive and time-consuming. After a competitive bake-off, this company chose to deploy Mitek's Mobile Verify solution to automate their onboarding process and make it faster, less expensive, and more accurate.
The new onboarding use case continues to be a big opportunity for our identity solution and is applicable across several large verticals, including financial services, lending, payments, travel, telco, and shared economy companies. In addition, we continue to see new use cases in other industries for enrollment and compliance. In fact, during the second quarter, we went live with a leading European cryptocurrency provider, BTC Direct. This new customer is using Mitek for the digital onboarding of new customers. Following a wave of interest in cryptocurrencies, BTC has experienced rapid growth with up to 3,000 onboarding requests a day. To accommodate this surge in demand and meet increasingly stringent regulations, Mitek's identity verification solution is being used to onboard those customers much more quickly. Regulators have recently been keen to crack down on anonymity in cryptocurrency platforms, which may benefit Mitek.
Many cryptocurrency providers are making it a priority to implement KYC processes that are compliant and scalable to keep up with the surge of customer sign-ups. This customer opted for Mitek's solution because of its strong product roadmap and after seeing great results in the testing period. Another customer, ABN AMRO, just last week launched their new mobile app with Mitek embedded. ABN AMRO is one of the top 100 banks in the world. As part of their mobile app, Mitek will help them convert prospects into customers, allowing them to expand their presence throughout Europe. On top of our growth from our direct sales efforts, we continue to see new ID wins from our channel partnerships. By reselling and integrating our identity verification technologies with partners like Experian, Vasco, and others, we're also accelerating the expansion of our identity solutions into key vertical markets.
One example of that is a new customer secured through our partner, Experian, in Europe. This customer, a tier 1 mobile operator with 130 million customers worldwide, is revamping their retail experience. Soon, every consumer entering their stores will have their ID scanned into this provider's system by a customer representative using an iPad. This will become part of their shopping experience to streamline service and credit purchases. Our partnership with Experian continues to also grow here in the U.S. In fact, last week, we demonstrated our identity solution to over 900 Experian salespeople during their U.S. sales kickoff event. Just last month, Vasco, a global leader in security and business productivity, demonstrated a solution for mobile onboarding at the RSA Conference that featured Mitek's identity solution.
Using Vasco's eSignLive product in conjunction with Mitek's identity verification solution, banks, lenders, and other financial institutions can leverage ID document verification and e-signatures to deliver a complete mobile onboarding process for new customers. Using our solution, Vasco can now offer its more than 10,000 customers in 100 countries a secure, compliant, and frictionless mobile onboarding process without the need for a branch or in-person ID verification. All of these customers and channel partners highlight the fact that enterprises around the globe are seeking solutions to enhance identity verification. We believe Mitek is well-positioned to address the need for a digital trust solution in the multi-billion dollar digital identity verification market. In addition to our growth and innovation in identity, we continue to dominate the mobile check deposit market.
More than 80 million consumers use our Mobile Deposit solution because they love the convenience of the mobile channel offered by more than 6,100 financial institutions in North America. Last month, we announced that our Mobile Deposit solution has processed more than 2 billion check deposits, totaling approximately $1.5 trillion in cumulative check value. Listen, the rumors of the check's death are highly exaggerated. With over 17 billion checks still written in the U.S. annually, according to the Fed. Adoption and usage of Mobile Deposit continues to grow year-over-year. The key growth drivers are consumer penetration and frequency of use. With the financial institutions focused on driving their customers to use the lower-cost digital channel and consumers enjoying the unparalleled ease of use, we expect continued growth in Mobile Deposit this fiscal year and for years to come.
As I think about this, the strength of our growing and profitable Mobile Deposit business continues to be a solid springboard for the burgeoning ID verification market. What we had to do to become a trusted Mobile Deposit partner with these 6,100 banks not only required us to develop the best technology in the world, but it also required us to invest in the necessary IT personnel, systems, Sarbanes-Oxley processes, security audits, ISO and SOC certifications, and controls to meet the stringent needs of the globe's top banks and financial institutions, as well as complying with all of the responsibilities associated with being a Nasdaq-listed company. I'm confident that this is also what sets Mitek's identity solutions apart in the eyes of prospective enterprise customers from small, private, or in some cases, financially challenged competitors.
We've worked hard to become the trusted provider for Mobile Deposit and are well-positioned to leverage this advantage as a leading provider of ID verification solutions. The rapid erosion of trust in the digital world and the need to rebuild that trust is presenting a greater opportunity for Mitek than ever before. Mitek's identity solutions squarely address this pain point and enable digital commerce. Our earnings results only confirm what we continue to hear in our channel and with conversations with buyers. Demand is strong, and more dollars continue to be allocated to digital transformation initiatives. In conclusion, our record revenue, our 17th consecutive quarter of profitability reflect successful execution of our growth plan for both our identity verification and payments solutions.
Mitek is enabling digital trust and building continued market momentum with Mobile Verify, and this momentum, combined with our growing Mobile Deposit business, positions us well for future growth. Now with that, I'd like to turn the call over to Jeff to discuss the financial results in more detail.
Thanks, Jim, and thank you, everyone, for joining us this afternoon. Let's start with the Q2 revenue and operating results. For the second quarter of fiscal 2018, Mitek generated record revenue of $14.3 million, a 25% increase year-over-year. Software and hardware revenue of $8.8 million was up 13% year-over-year. We maintained strong software and hardware gross margins at 94% for the quarter. Services revenue, which includes SaaS, maintenance, and consulting, was $5.5 million for the quarter, an increase of 52% over last year's Q2 revenue of $3.6 million. The increase in services revenue is due primarily to growth in transactional SaaS revenues from our mobile identity products, which increased 91% to $3.3 million, from $1.7 million in Q2 a year ago. Services gross margin were 78% for the quarter, compared to 81% in Q2 2017.
The services gross margins were impacted by an increase in headcount and third-party hosting costs. Q2 revenue from ID products increased 109%, and revenue for the payments business was flat as anticipated. The revenue overperformance for the quarter was due to strength in the ID transactions from our SaaS customers and favorable ID on-premise renewals. Total operating expenses, including cost of revenue, were $15.5 million compared to $10.2 million in Q2 last year. The year-over-year increase in operating expense reflects our continued investments to grow our identity business, as well as the additional ICAR operating and acquisition-related costs. Sales and marketing expenses for the quarter were $5.3 million, compared to $3.7 million a year ago. R&D expenses were $3.5 million compared to $2.4 million last year, and our G&A expenses were $3.8 million compared to $2.7 million 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, stock comp expense, and litigation costs related to protecting our intellectual property. GAAP net loss for the second quarter was $1.2 million or $0.03 per share. Non-GAAP net income was $2.1 million, or $0.06 per diluted share, representing our 17th consecutive quarter of non-GAAP net income. In Q2, we incurred $1.2 million of acquisition-related costs and expenses compared to $518,000 last year. These costs are made up of approximately $650,000 of intangible amortization expense and approximately $500,000 of earn-out related charges recorded during the second quarter. Stock comp expense was $2.1 million compared to $1.2 million a year ago.
Our diluted share count was 36.7 million shares compared to 34.8 million shares a year ago. Turning to the balance sheet. During the quarter, we generated $1 million in cash flow from operations during the year, bringing our total cash and investments to $45.3 million at the end of Q2. Our accounts receivable balance of $7.8 million represented a DSO of 42 days. Now moving to guidance. We are increasing our previously provided guidance for annual revenue of between $57 million and $59 million to the new range of between $59 million and $60 million for our fiscal year ending September 30th, 2018. This would represent revenue growth between 30%-32% year-over-year. We expect the payments business to grow between 15%-20% and the ID business to grow 65%-70% for the full year.
As we continue to see strong market demand for our digital identity verification solutions, we will continue to invest in this growth opportunity this year and for the foreseeable future. We also continue to expect to generate healthy non-GAAP profit margin of between 19%-20% for the full fiscal year 2018. For the third quarter, we expect total revenue to be in the range of $14.5 million-$15 million, representing 23%-27% growth year-over-year. We expect total operating expenses for Q3 2018, excluding acquisition-related costs and stock comp expenses, to be between $12 million and $12.5 million. Our investments to grow the identity business were made in the first half of the year, and the growth rate of these expenses are expected to slow in the second half of the fiscal year.
We expect acquisition-related costs and expenses to be between $600,000 and $700,000, and stock comp expense to be between $2.2 million and $2.3 million for Q3. Operator, that concludes our prepared remarks. Please open the line for questions.
Thank you, sir. The question and answer session will be conducted electronically. If you would like to ask a question at this time, please press the star key followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure the mute function is turned off to allow the signal to reach our equipment. Once again, if you would like to ask a question at this time, please press star one. We will take our first question from Bhavan Suri with William Blair. Please go ahead. Mr. Suri, your line is open. Please check your mute button.
Hey, guys, sorry. This is Arjun Bhatia in for Bhavan. Just wondering if you guys can provide an update on the sales and marketing investments that you've made in the first half of the year. Growth clearly seems to be coming in strong, but can you provide any qualitative feedback on how the sales team has ramped in the ID market and how their success is tracking versus internal expectations?
Sure. I'll answer that. This is Jeff. We have increased the headcount in sales and marketing. I think entering the year, we were probably between 30 to 40 people in that group, and we're well over 50. I think we're actually above 60 in the sales and marketing team now. Definitely headcount investments there. The reason we're making the investments is we're seeing a lot of opportunity, lead flow, and building pipeline. We're pleased with the results we're seeing from the investment we're making in sales and marketing. Like I said, it's focused on headcount.
There's two additional items, I think, to augment what Jeff has said. On the indirect channel sales, we're also engaging more actively now with our channel partners. I mentioned Experian and Vasco, among others. The last thing, per my comments earlier, is this national narrative that has changed, which is providing impetus for more activity and more exploration and more deals as it relates to identity verification. I believe our timing is good and our investment is paying off.
Got it. That's helpful. On the deposit side of things, we've talked about in the past how it's much more cost-effective to do the Mobile Deposit versus in-person deposits. In that light, can you talk a little bit about how you look at pricing power here going forward? Is there any possibility of increasing pricing for these services in the future?
In regard to what product, please?
Any of the deposit products.
Great. Yeah. Mobile Deposit has been in market now for 8 years, it continues to dominate its space. Again, all of the growth is coming from additional consumers and frequency of use. We've actually have seen indications from studies independent from Mitek that check volumes are holding steady or their decline is reduced. We are encouraged by the opportunity and growth prospects ahead of us. We continue to innovate in the product. We're on our 30th release and have added features that have helped us maintain our current ASP in market. We believe that we have outdistanced any competition. In fact, we face very little competition, the natural assumption is that we have pricing power. However, we work through channel partners and in an industry that has established a fair market value for that service. We are working hard to sustain that.
There's always going to be price pressure, the way we counteract that and sustain our ASP is through continued innovation. We've mentioned in calls past new transactions that we are conducting with people like the American Cancer Society, the American Heart Association, trying to get money into their accounts sooner from donors. We see lots of other opportunities like this. We believe we are able to stabilize and sustain our price points. We do not anticipate increasing those prices, we anticipate growth through activity of transactions and other use cases.
Got it. That's very helpful. That's all for me. Thanks for the color, guys.
Thank you.
We will take our next question from Darren Aftahi with Roth Capital. Please go ahead.
Hey, guys. Thanks for taking my questions, and congrats on the quarter. Just a few, if I may. Your ID business, while it's small, has kind of been around for a little while now. I'm curious if you guys look at cohorts of newer customers sort of way back when and how fast those are growing after, say, a 12 or 18-month period. As a derivative of that question, I'm kind of curious of your transaction makeup. How does that skew in terms of maybe the top two or three verticals? I've got a follow-up.
On the ID business, the transactions and the customers, I'll go to the transactions first. We definitely have some customers that are higher on the transactions, but I wouldn't say the transaction makeup on the ID side is like 80% and a handful of customers. It's spread pretty well. What we do see is customers will launch, as we've talked before, they launch with pilots or proof of concept, then it develops. The customers who've been with us longer, they obviously have the higher level of transactions going through their systems. I think that probably has to do with our technology's embedded in their apps and their apps develop over time as their mobile experience develops over time.
Darren, to augment Jeff's comments, this market is new. You had made an earlier comment that this market's been around for a while. I would challenge you on that one. This has, up to this point, been an exploratory market as workflows have changed and as old systems like knowledge-based authentication have been corrupted through this onslaught of data breaches. This problem is relatively new and companies are scrambling. Fortunately, the companies that we've signed earlier, a large payments processor here in the U.S. that has global operations, their transaction volumes are growing because they are now incorporating the workflow more broadly, and there's more familiarity among consumers to image their ID as a means to protect themselves, overcoming some consumer habits from the past. I think this is very early stage market.
We're seeing success with our primary customers growing in their volumes on their pay-go models. Now we're evolving into a broader set of verticals as we see demand increasing broadly, perhaps due to some of this national narrative that we've been reading about and seeing on TV most recently. ID proofing, which if you recall a year ago, you and others would ask, what are the use cases, is now very evident as a key element in terms of protecting the trust, rebuilding that, and protecting the consumer elements that these companies have. We're quite encouraged, really, by what we're seeing out there right now. We think we're in a very good competitive situation, and our technology is performing well. All these things add, I think, to momentum.
Great. Just following up on some of the comments you made on your customer wins, both channel and direct. On your large insurance provider for CE devices and the mobile operator in Europe, I guess, one, what's the mix of new customers sort of indirect versus direct? Then on your large insurance win, I'm just curious, how competitive of a process is that? Other than kind of the usual suspects, are there any other kind of verticals or players you want to think about that are kind of competing in the space? Thanks.
Yeah. Let me speak to the distribution channel and its mix. We are seeing the bulk of our new customer acquisition coming through our direct sales efforts today, but a growing percentage coming through channel partners as we enable them. A major element of our marketing investment is channel enablement. We have personnel focused on that to engage with customers like Experian, channel partners, and Vasco to not only work with their salespeople to educate them on our selling processes, but furthermore, to assist their technical people to embed our technology and their solutions. We are an embedded element in Experian's featured CrossCore platform. This is their new platform, which allows their customers to utilize a variety of tools to verify identities, not just data, which was used in the past. As I explained, data alone is inadequate.
We're a critical element of their go-to-market strategy, and part of the technology is integrated into their core platform. We've now educated their sales force, and we will do joint sales calls as we have in Europe. Experian, you may know, is a London-based global corporation. We are actually making tremendous progress in channel, but as with Mobile Deposit, the same will be for Mobile Verify. It takes time to get channel partners informed and executing. That's why we have relied up to this point on investment, and we will continue on our direct sales efforts. I think that speaks to the question of channel distribution and how it relates to our direct efforts. With regard to the use cases, Darren, what I would encourage everyone to think about are two primary use cases.
Onboarding new customers, meaning as they enroll digitally, being able to authenticate and identify their and verify themselves is a key element that streamlines the process. Often through enrollment and onboarding, people abandon the process because it's too cumbersome, there's too many questions, or they make errors. By virtue of a simple MiSnap of their ID, they're able to pre-fill a form, verify the authenticity of that document and the individual through a facial recognition and comparison to the photo ID, and streamline that process. Onboarding is a very critical element of this large tier 1 mobile operator that I mentioned and this large cryptocurrency customer I mentioned. The second piece is the compliance part. As these new rules and regulations, in fact, on May 25th, GDPR goes into effect in Europe. There are significant penalties for non-compliant companies who deal in data and particularly private information.
We help protect that, and we help protect the consumer. We believe that we have a good position in the marketplace vis-a-vis our smaller competitors that we see out there. We believe with, again, not just our technology advantage, but our corporate advantage, that we're a trusted provider as well. We like where we're at, we like the space, and we like where the industry is headed.
Great. Thank you.
We will take our next question from Mike Grondahl with Northland Securities. Please go ahead.
Yeah. Thanks, guys. Hey, Jeff Davison, could you repeat what you said about what drove the outperformance in the quarter, kind of above your roughly $13.5 million guide?
Sure. The overperformance was due to strong performance on our SaaS transactions for our ID business and favorable renewals for some ID on-premise customers.
Hey, can you just define that? What does that mean, favorable renewals? Sort of like their
Sure
got renewed?
Sure. Yeah. Sure. Obviously I had visibility to renewals that are coming up, and these two renewals that came in were favorable to what I had forecasted that we were going to get on them. That's a good portion of our overperformance along with the SaaS transactions.
Got it. Secondly, you guys called out that you're over 60 salespeople today from roughly 30 to 40 six months ago. How long does it take to get one of those salespeople kind of up and going? What is the quota or the goal for them at the end of year one or year two?
Just to be clear, the numbers I gave you were our sales and marketing organization. I don't want you to think we have that many selling sales reps. They're a portion of that, but there's also support in all those orgs. The ramp time for sales reps is like most companies, it's three to six months before they're actually up and running productive. They have to build pipeline as well.
For us this past year, we were hiring early in the year. We've seen some of them get up and running and are actually starting to produce already. We think that we'll continue to see that through the end of this year. As we move into next year, we'll invest in more sales reps as we forecast 2019 to show growth. I think hopefully that answers your question.
Yeah, it does. In the Mobile Deposit side, do you still have sort of a pristine retention rate of the banks? Is that still roughly 100%?
Absolutely.
Got it. Just moving to Mobile ID, it was helpful to hear a couple more customer wins and a couple that went live. Is there anything you can say maybe about the range of prices that you're getting for a transaction? I don't want to ask about any one customer, but of some of the ones you won, can you just give us a range, sort of what you're charging if you're verifying an ID in some of these.
Mike, this is Jim. Listen, we have never disclosed our prices as we actually do our contracts. We've discovered, however, that as these individual enterprises enter into their new use cases, we're able to sustain what we've talked about generally in the past. Our pricing policies have been supported by the market, and we don't see that as an impediment. This is actually a very critical element, as you can imagine, in the workflow. The cost of a customer acquisition is upwards of $200-$300 in a bank. That's a documented figure. To add another dollar or two, or whatever the case may end up being is insignificant amount to retain or to obtain a new customer. We like the pricing.
It is significantly different than Mobile Deposit as we add a tremendous amount of value in new customer acquisition, and secondly, in compliance, which carries significant penalties. For that reason, we've moved up the ASP for the corporation. If you recall, Mike, years ago when we began this journey on Mobile Deposit, our efforts have been to transform this company into a cloud-based platform for recurring and predictable revenues. Secondly, to move up the value chain in terms of what we can charge for what we think is the best technology of its kind in the world. I think we are now accomplishing that, and you're starting to see traction in our SaaS transactions, in our pricing policies, and how we're engaging major enterprise customers, not just here in the U.S., but globally.
No, perfect. Maybe just to follow up to that. You're getting some of the pricing that you talked about a year or two ago, and I guess you said it's significantly different than Mobile Deposit, which would, I think, translate as to significantly higher.
That's correct.
Got it. Okay. Hey, thanks a lot.
Thanks, Mike.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We will go next to Mark Schappel with Benchmark. Please go ahead.
Hi, good job on the quarter, thank you for taking my question. Jim, starting with you. The ID business was clearly another star performer, or was the star performer in the quarter, but the mobile check deposit business appears to have come in better than expected as well. I was wondering what changed during the quarter that drove the better results in that business.
As you know, Mark, from covering this industry for a while now through our go-to-market relationships with channel partners, that we sell to a defined group of channel partners who then resell the products to a broader list of banks. That's how we are able to scale, that's how we are able to control and dominate this space. Control may be too tough a word, but certainly dominate. Timing is always critical with regard to how we secure these deals based on consumption, transactions in the marketplace. It was a timing issue, but honestly, we've been very open that the growth rate for deposit is 15%-20%. Mobile Deposit is as predicted. It still makes up a major part of our revenue. We anticipated that it would come in at a certain rate, and it did exactly as we predicted there.
The bump really that we experienced and reported just a minute ago is related to our ID products.
Yeah, just to make sure we're clear on that. The Mobile Deposit business for the quarter was flat over last year as we expected it to be. Where the performance this quarter was really on ID side. Okay, thank you. On the revenue guide. You're raising your 2018 revenue guidance, but operating margins are unchanged, implying that you're planning to make some additional investments in the business in the next two quarters. Where are you planning to direct those investments?
Our investments are where they have been, which is in technology, so R&D and sales and marketing. That's our focus. Like I said in the prepared comments, it's not going to be significant the next two quarters. We've front-end loaded a lot of it. It'll tick up a little bit, but not significantly the next two quarters.
Okay, thank you. Jim, in your prepared remarks, you noted an increase in government regulation as one of the drivers for the ID business. I think in an earlier question, you touched on GDPR. Are you seeing GDPR which is going into effect here shortly, or actually right now, are you seeing that drive your business, particularly in Europe?
Yeah, we see it as a very important element. It was important in our ability to secure MoneyGram as a customer that we've reported earlier. We definitely see this as a major initiative. It's an important piece of legislation. It comes with big compliance penalties for companies that don't conform, and the need for identity verification, I think, is going to benefit from that, and so will the companies. You bet. I think we're entering a new era both on this continent and in Europe with regard to this whole idea of identity and verification and trust. We're going to benefit from it by being in market at the right time with the right technology. These regulations, and I can add to that, AML is an anti-money laundering. Those get tougher and tougher globally for obvious reasons.
Again proving an identity over and over again when there is money transactions cross-border is very critical. We see that as a driver as well. These, as I mentioned, alphabet soup of regulations are very important to our market and to Mitek's long-term success.
All right, thank you. That's helpful.
We will take our next question from Ilya Grozovsky with National Securities. Please go ahead.
Thanks, guys. Just wanted to get the revenue mix domestic versus international.
We don't publish that specifically, but what I would tell you is the U.S. piece is the majority and the international piece is between 30%-40%, around there. Over time, that will grow. Over the last year because we added ICAR, their revenue is mostly outside the U.S., so that definitely increased that number.
Great, thanks. Also if you can just talk about the gross margin trend for the second half of this year.
Gross margins should remain pretty constant. We enjoy a very high software and hardware margin. If the mix of revenue in one of the quarters has a little more hardware it'll obviously impact that margin line a little bit. For a blended margin, we don't really expect much change through the end of the year.
Great. Thank you.
Once again, if you would like to ask a question, please press star one. We will take our next question from Mike Wallace with White Pine Capital. Please go ahead.
Hi, Jim. Mike Wallace. How are you?
Good, Mike.
Good. Great results this quarter. Hey, I was just going to wonder about how, Jim, if you could give us some characterization of comparing the pathway that ID is on now relative to the pathway that deposit was on and kind of comparing and contrasting the two. Then the second question is around the competitive environment in ID. When you're in competing with others, could you talk a little bit about how you're winning?
Yes, Mike, let me answer the first question. As you remember, with Mobile Deposit, it was a very forward-thinking idea. We were the first to innovate that area. We entered the market in 2008. We secured our first customer that went live in 2010, that was JPMorgan Chase. The other banks followed, and the rest, as they say, is history. We have 6,100 banks and 80 million consumers today and no competition of any note. Fast-forward to Mobile Verify. We have leveraged our investment in our core machine learning and AI technology. We happen to read documents using a camera on a mobile device extremely well. Furthermore, we added our ability to use the device itself, the phone, and have created an auto capture capability. That has been magical to consumers who find it very easy to use.
Meanwhile, we get great images that allow us to be even more accurate in how we extract the data for processing. The investment we've made in Mobile Deposit is definitely being leveraged into our success with Mobile Verify. The difference is we're actually penetrating the Mobile Verify and the identity verification market faster in a quarter of the time it took us with Mobile Deposit. We have a blue-chip enterprise base of customers that are growing in transaction value through our cloud today in a matter of two years when we began launching Mobile Verify. It took us much longer to do that with Mobile Deposit. I credit that to our learnings not only in our technology but also our selling technique. We have embarked upon selling directly. We do control the conversation, we control the pricing, and we control the targets.
That's not always the case when you initiate with the channel partner who have their own business model. We think we've gotten smarter, we've learned a lot, and I think consumers, their habits have changed to use their mobile device in a very unique way. Before, the camera was simply for photos and selfies. Today, it's to capture documents and information. All those things are to our benefit. Competitively, Mike, to answer your second question, we think we stand apart from our competition. The bulk of our competitors, in fact, all of them, to my knowledge, are small companies. There are no public companies, to my knowledge, and some of them are financially challenged. They don't have the balance sheet that we have.
When we appear in front of a major bank, as an example, in front of a major shared economy player, as an example, in front of a major payments processor globally, as an example, we present ourselves as a publicly listed, a very solid balance sheet, very experienced with Mobile Deposit success and the consumer experience. We bring these credentials to these enterprise customers, and I think we stand apart. Secondly, when we present ourselves, since this is a market that is all about privacy, security, and identity, we have the credentials and the certifications that are required as a public company and through the audits that have been conducted on premise by our major bank customers as a matter of their record, and we have that under our belt, and our competitors are not doing that.
We really are, we think, best in class, certainly, to sell our technology into major enterprise customers, and those are the customers that are going to give us the transaction volume to grow.
Yeah. Deposit is very sticky once you're in. Tell us about how it works in ID.
Well, I think it's sticky, too. It becomes part of that process now. Again, you wouldn't hear Mark Zuckerberg in front of Congress talking about ID proofing a year ago. You certainly heard him 30 days ago. This is where the market's growing. This is a requirement now that the old methods of authentication, or as you should say, verification, first time you meet a prospective customer digitally to verify them, those old methods used to be reliant on data that was stored or your Social Security number that was secure. Today, it's breached. That information is public. It's on the dark web. You can buy it for $1. You can't do that with your identity card with your biometric match, and that's what we do.
We believe that there's a significant amount of re-engineering going in workflows, major companies across this continent, Europe, and the world, as they re-engineer their processes to engage new customers. Now, they've got to do it in a frictionless way that doesn't scare off their customers. Not too many keystrokes, not too many other items of friction. By taking a single snap of an ID, we can capture information, we can provide that information to the system, and we can verify the identity of the individual. These are things that couldn't be done with a data bureau. That's why Experian partnered with us. We believe it's very sticky and very critical to the ecosystem.
Last question. Deposit, you used a lot of resellers in the channel. You're going direct more with ID. Can you give us, and maybe this is a little question for Jeff, too, how does the business model margin structure play out as we now go and really grow ID without using the channel partners but going direct in terms of margin structure?
With the channel partners for selling, there's really no difference. We're not giving up like 30 percentage points or anything like that with the channel partners. It's same price going through.
Do we get a margin lift by going direct?
Right now, I don't think that we've seen that really start to happen. Most of this with the channel partners, they're adding our technology into their offerings, it's making them have an offering they didn't have before and makes them more competitive. I think they're able to get business they couldn't get without us being part of a solution.
Yeah. I guess I'm thinking of it, Jeff, maybe down the road, another maybe 12-24 months as you leverage the sales force and bring more revenue dollars across each salesperson and collecting and being able to leverage that through the model. What are your thoughts on how that develops in terms of your operating margins?
If you look out two years from now, and if the channel is a much bigger piece of what we're doing, I suppose there could be that chance that we're giving up a little bit of margin to be selling through the channel. Right now, it's not the case. I think as long as we're leading with technology that they don't have, I think we've got a pretty good foot to stand on to not lose much there in the selling process.
Okay. Thank you.
Good talking to you, Mike. Thank you.
At this time, there are no further questions. I will now turn the conference back over to the company for any closing comments.
Thank you, operator, and thank you, everyone, for joining us today. Mitek's management will be presenting at the upcoming Needham Emerging Technology Conference in New York on May 15th. If you happen to be attending, please stop by and say hi. We hope to see you there. This concludes our call. Have a great day.
Once again, this will conclude today's conference call. We thank you for your participation, and you may disconnect at this time.