M&A Announcement

May 23, 2018

Press Release

Good day, and welcome to the Mitek Systems Corporate Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Curley, MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon and thank you for joining us. On the call today are Jim DiBello, Mitek's Chairman and CEO Jeff Davidson, Mitek's Chief Financial Officer and Steven Ritter, Mitek's Chief Technology Officer. Before we begin, I'd like to cover a few quick items. This afternoon, Mitek issued a press release announcing its acquisition of A2iA. That release is available on the company's website at mitecsystems.com. After the prepared remarks, we will conduct a question and answer session. This call is being recorded and 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 for integrating A2IA and expectations of the combined company's 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 2338, 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. With that said, we'll now begin with Jim's prepared remarks. Thanks, Todd. Today, we announced the acquisition of ATIA, a global leader in artificial intelligence and image analysis. This combination extends Mitek's global leadership in both digital identity verification and mobile check deposit. AQIA is a terrific company. This acquisition brings us scale, science and synergy. The addition of AQIA scales our business and accelerates our path to $100,000,000 in annual revenue. The science they bring to Mitek doubles on labs, forming the largest private research group of PhD scientists in artificial intelligence and machine learning in this industry. And it enhances our performance by adding multiple algorithms and engines for verification and document processing. And the synergy this combination creates brings A2IA's emerging mobility suite for documents and IDs to our leading digital identity verification platform, while at the same time solidifying our lead in mobile check deposit. AQIA has developed proprietary algorithms that process millions of documents each day for banks, retailers, insurance companies, mobile operators, healthcare providers and governments in more than 42 countries and 11 languages. Their technologies include handwriting recognition, intelligent word, cursive and optical character recognition. And combined, our Mobile Verify product will be able to read government issued ID documents even more accurately and quickly than today and authenticate them using advanced AI algorithms. This acquisition also solidifies Mitek's leadership in mobile deposit and makes Mitek the global standard in check imaging across all channels, including mobile, RDC, ATM and branch. As today's headlines demonstrate, creating trust in digital channels at scale is vitally important and a continuing challenge for enterprises. We've created trust in the mobile check deposit market and now we are focused on enabling trust for companies doing business in the digital market. We're excited about this acquisition and believe the combination creates a new leading force in digital identity verification. That concludes my prepared remarks. And now, I'd like to turn it over to Jeff. Good afternoon, everyone. We are excited about this transaction as it brings accretive revenue at scale and we are updating our guidance for the rest of the year. We purchased A2iA for EUR 42,500,000.0 in cash and stock. The purchase price was paid with €24,400,000 in cash and approximately 2,500,000.0 shares of Mitek common stock with a value of €18,100,000 For its fiscal year ended December 3137, A2I recognized revenue of EUR 12,900,000.0 and approximately EUR 1,700,000.0 in operating income. Net of the required purchase accounting treatment, we are expecting A2IA to add approximately $3,000,000 in revenue to the remaining four months of Mitek's fiscal twenty eighteen. We expect this transaction to be accretive to non GAAP earnings per share in our fiscal year twenty nineteen that begins October 1. However, for the remaining four months of 2018, the acquisition will be dilutive to earnings due to the previously mentioned purchase accounting treatment. Looking forward, we expect to grow the business 10% and we expect to achieve annual cost synergies related to royalty expenses and operating expense in the range of $2,000,000 within twenty four months. As a result of the acquisition, we are providing updated guidance for fiscal year twenty eighteen and our third quarter. For the fiscal year, we now expect revenue to be between $62,000,000 and $63,000,000 which would represent 37% to 39% growth year over year. For the year, we are expecting non GAAP operating margins to be approximately 15% to 16% due to the increased operating expense and the impact from the purchase accounting treatment on A2IA's revenue. We expect our non GAAP operating margins in 2019 to return to the previously expected range of 19% to 20% as we move beyond the purchase accounting treatment. For our fiscal twenty eighteen third quarter, we are expecting revenue to be in the range of $15,000,000 to $15,500,000 which would represent year over year growth of 27% to 31%. We are expecting total operating expenses for Q3, excluding acquisition related costs and stock comp expenses, to be between $13,500,000 and $14,000,000 dollars Now, I'll turn the call back to the operator to open the call to any questions. Thank And we will take our first question from Joel Fishbein with BTIG. Please go ahead. Hi, guys. Congratulations on the deal. I just have a couple of quick ones for you. Number one is the in terms of the management of the company, are they staying on board? Are they and they're going to become a part of Mitek? I'll start there. This is Elias. I'll take that one. Yes, sorry. Yes, they will be staying on with the company. There are no plans at this time to make any changes. When we get into integration, we'll figure more of that out, but no changes. Okay. And then can I add just one other comment? Sure. Joel, Mike Diamond, our Senior VP and General Manager, who's been with Mitek for over five years and has done a terrific job for us, will be our executive in charge of integration and managing the A2IA integration with Mitek. But we'll continue to operate A2IA in the near future as they are currently operating. And so we're we just have a terrific asset, great people, wonderful cultural fit in this group. Mike's job is to bring that all together within the Mitek family, continuing and executing on their plan and augmenting ours. Okay. And Jim, I guess just a follow-up for you, and I have one more for Jeff and then I'll turn it over. You talked a lot about in your opening remarks about their leadership in artificial intelligence. I just wanted to know or try to understand what do they have that augments what Mitek already had? And you had quite a substantial patent portfolio in AI and I'm just trying to see how just talk about it from a technology perspective and not just a revenue perspective? I will and then I'll ask Steve Ritter, our CTO, to additionally comment. I've known A2IA for over a decade. They are primarily a science based technology company servicing global partners. They have fantastic intellectual property in the area of computer vision, machine learning and extension into deep learning. Specifically interesting to us were a couple of areas. One, there are advances in the mobility area on a new product set that we think is very interesting. Secondly, they operate with different language capabilities. And as you know, Joel, in the identity game, it's important to have global coverage. And they do with other languages that we don't today, including Asian languages and Arabic languages that we think ultimately could be important to us as we continue their growth path in geographic expansion. And the last thing that they own and have developed over the years is cursive handwriting, which is very interesting. This is actually more than handprint. This is your script. And to be able to identify key fields and characters of unique different types of handwriting in cursive. This is very critical to our mobile check deposit product, particularly reading the courtesy amount and the legal amount. That's a core component of mobile deposit. And now with A2IA, we own that component, which we previously had licensed. And so this again reduces the dependency and allows us to have synergies in terms of cost savings over time. Concurrent with this announcement, we are also announcing the integration of the A2IA CARLAR engine into version 4.7 of our mobile deposit product available today. And that's how quickly we think we can integrate some of the key elements. We also believe that they have capabilities that will advance our ability to accurately and very quickly read security features on different IDs and documents around the globe. You may not know that in Brazil, many of the identity documents have handwriting elements on them. The same is true in Italy. So for us to have global coverage, we think this acquisition embellishes our core science, adds to our Mitek Labs team and gives us greater strength and time to market advantage. And I'll turn that now to Steve for any further comments. Steve Ritter, our CTO. Thanks, Jim. That was a very thorough answer and I'm not going to add too much to it. But one thing I will say is when we were working with the A2IA team and trying to understand exactly the question that you asked, what are you going to be able to add to Mitek's technology portfolio, what we were really impressed with was how they had taken a technology that they've been working on for quite a while and pushed it really into the newer realms of machine learning. They have been focusing very heavily on a form of deep learning known as recurrent neural networks and long short term memory. And we were just really impressed with how far they had pushed it and had really been innovating within their space and felt that would be a fantastic add to our growing team of deep learning researchers. Okay. And Jeff, just the last one for you and then I will see the floor. You talked about A2iA contributing $3,000,000 in the last four months of fiscal 'eighteen. Can you give us a little color on fiscal 'nineteen, what you expect the contribution to be for the full year of fiscal 'nineteen? Yes, Joel. So, in 2017, they were at €12,900,000 We think that's a pretty good benchmark run rate. However, there will be I mentioned the purchase accounting, so there will be some deferred revenue that we won't get to recognize. That will probably impact the first twelve months. So, it's going to impact the four months, they'll remain and then part of 2019. But beyond that, the run rate business, we should see and we should be able to grow that. That's where my comments about growing at 10%. So, if you take that 12,900,000 and convert it at somewhere around $15,000,000 Our next question is from Darren Aftahi with ROTH Capital Partners. Jim, can I just follow-up, you said you listed off a number of things attractive on the technology side, but you said in particular mobility, they have sort of a new product set? Could you expand on that? And then two others, was this a competitive process? And then lastly, I kind of the call kind of went in and out. Jeff, could you repeat your comments about the third quarter impacts from the acquisition? Thanks. Darren, let me kick off with my comments with regard to ATIA. As I have mentioned earlier, we've known them I have known them personally for over a decade and competed against them with some of the core products in mobile check deposit. And so we believe this has a couple of benefits. One, any potential risk from competition, we believe that this is a competitor that we have absorbed. Number two, and specifically with their new mobility set, a core part of that, and you can go to the website that listed I think we have it listed on our link in our press announcement. Their mobility package also reads identity documents and passports. And again, with that added language capability gives us greater opportunity to coverage to cover other geographies. And that's very, very important to us. So we think the mobility suite has some unique advantages that will augment what our Mobile Verify product and platform does. So that answers that question. Perhaps we can go to Jeff to answer the other question about some of the financials. Sure. Darren, for the third quarter, we're expecting revenue to be in the range of $15,000,000 to $15,500,000 So, that's a slight increase from our previous guidance. It's about $500,000 dollars And we expect the acquisition or the operating expenses, excluding acquisition related costs and stock comp expense, to be between $13,500,000 and $14,000,000 Great. Just one follow-up. So, as we think about the contribution from the acquisition, the augmentation on your I guess, if we segment both of your businesses, Jim, how does and Jeff, how does this impact Mobile Deposit in terms of a catalyst for growth, ex the revenue you're actually bringing on? And then how does it impact your ID business from a catalyst? Meaning, say another way, like you're integrating some of this technology right off the bat. How does that kind of change the parameters for sort of incremental revenue opportunities on the margin? Thanks. Jeff? Well, I'll be there. Okay. To augment my earlier comments, Darren, to you with regard to mobility and their suite, there's an element that you may not be aware of that we're getting requests from customers with regard to reading documents that are not identity documents, but they're used in identifying an individual and verifying either their date of birth, their location of residence or other trailing documents that can be used in an enrollment process. So this acquisition not only gives us capabilities in our mobile identity and passport and driver license capabilities, it also gives us the ability to read additional documents that are used in the mobile enrollment process for securing loans or credit cards or other products from enterprise customers that we serve today. So we'd like the added product breadth with regard to documents that can be read in addition to identities. And let me just also mention to you, Darren, another aspect on the mobile deposit side. Part of the synergies that Jeff has referred to in his comments will come from integrating their CAR LAR, their Courtesy Amount and Legal Amount recognition into the core product, mobile deposit. And that will reduce some costs and sustain or grow our gross margins. In addition, as we mentioned in some of the prior remarks, we now have capabilities, omni channel with regard to mobile, RDC, branch and back office, which A2IA has been strong in leading for their existence. So we have, we think, a larger presence in core bank customers. And as a result, we think we have additional opportunities to cross sell our identity products and other services into those banks and financial service customers. In addition to that, A2iA has serviced other very large retailers, and we believe that gives us access to additional vertical markets that we didn't have before because of their penetration. So we do think that the combination under our management structure and our global sales processes and channels of distribution and direct selling efforts can be augmented with their product lines and with their customers through our management process. So all that means to us is that we can take their business and we believe that we can not only sustain it, but we can grow it and we'll also be able to recognize synergies from it. We will take our next question from Bhavan Suri with William Blair. Please go ahead. Hi, guys. This is Arjun Bhatia in for Bhavan. Thanks for taking the question. Just a quick one on margins. Can you just elaborate a little bit on the gross margin impact and how you see that playing out for the rest of this year and then in 'nineteen? Yes. The gross margins for the company are pretty similar to ours for the check deposit. They should be in the 90% range. I will caveat that one little bit, because they've been reporting under French GAAP. The French GAAP doesn't exactly break out a P and L like The U. S. GAAP. So that's not a real clear number off their financials, but it should be around the 90%. For 'eighteen, because of the purchase accounting impact on the deferred revenue, that's probably a little bit lower because we're not going to recognize all of the revenue, but we'll have the cost. But then when we get out of the purchase accounting period midway through 'nineteen, it will return back and it should be strong gross margins like our mobile deposit. Got it. Thanks. And then from an operating margin perspective, it looks like they were at about 13% based on the numbers you provided. Just with that in mind, how are you thinking about the synergy timeline and when you think this will be fully integrated into Mitek? Well, we released today, shortly after this announcement, an announcement that we've already integrated their technology into our mobile deposit platform, which is terrific. So, as we get that rolled out, that will be helpful for us. We think there are other operating expenses that we can see synergies come from, and we'll also see some growth that we think we can obtain through this as well. But our comments were we think there's probably a good $2,000,000 in synergies over the first twenty four months. Great. Thanks guys. And our next question comes from Mike Grondahl with Northland Securities. Please go ahead. Hey, guys. Two quick questions. One, could you just highlight a couple products that are driving sort of the $12,900,000 revenue in euros, the main couple? And then secondly, by integrating their CARLAR technology into your mobile deposit, what benefit one or two did that give you? Sure. So, the products driving the $12,900,000 there's a good majority of that that comes from their check reader product. And then they also are getting a fair amount of revenue from the document reader. And then finally, would be the mobility is a smaller piece, and that's because that's a newer product. The check reader is the largest piece of the revenue. The integration to our mobile deposit is meaningful because we currently use our competitor of A2IA in our product for the car lot reading. And so, this gives us that ability to remove that, use this and we'll save on those costs. That's the value of that integration. Got it. Okay. Thank you. And we have no additional phone questions at this time. So, I would like to turn the conference back to Mr. Jeff Davison for any additional or closing remarks. Thank you, operator. I'd like to conclude by saying we're excited about the acquisition of A2iA and the opportunities this combination creates. We look forward to updating you further on our next earnings conference call. Thank you and this concludes our call. Have a good day. Ladies and gentlemen, once again, this concludes today's call and we thank you for your participation. You may now disconnect.