Earnings Call: Q2 2021

Apr 29, 2021

Good day, and welcome to the Mitek Systems Second Quarter Fiscal 2021 Financial Results Conference Call. At this time, I'd like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead, sir. Thank you, operator. Good afternoon, and welcome to Mitek's Q2 fiscal 2021 earnings conference call. With me on today's call are Mitek's CEO, Max Carnecchia 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 Q2 fiscal 2021 financial results. That release is available on the company's website atitek at systems.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website. I 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 Form 10 ks and 10 Q for a complete description of these risks. Our statements on this call are made as of today, April 29, 2021, and the company undertakes no obligation to revise or update Additionally, throughout this call, we'll be discussing certain non GAAP financial measures. Today's earnings release and the related current report on Form 8 ks 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. Good afternoon, everyone. Thank you for joining us today. I hope you and your families are staying healthy and safe. First, I want to commend the Mitek team for their continued hard work. Because of your dedication and determination, Mitek delivered record second quarter revenue with exceptional performance across both lines of business. For the 2nd consecutive quarter, our identity verification revenue grew more than 45% year over year, highlighting our leadership in this high growth market. Our deposits business also continued to deliver Solid revenue growth driven by increasing consumer adoption. All of this resulted in revenue of $28,800,000 up 24% year over year. Also, we delivered non GAAP net income of $7,300,000 or $0.16 per diluted share, up 34% year over year and cash from operations of $7,300,000 We remain energized by the rising momentum in the identity verification market with digital identity Solutions rapidly emerging as the nexus to building trust and doing business online. More and more of our existing customers are expanding identity verification well beyond the initial onboarding use case. And this quarter, we added numerous new customers outside of the financial services as we helped organizations in telecommunications, marketplaces and technology establish an appropriate identity verification solution. Identity verification has never been more relevant. Rapid advances in artificial intelligence are enabling novel forms of fraud and increased scale and frequency of data breaches, all of which is adding heightened pressure on organizations to protect customers' data and access. As I recently wrote for the Forbes Business Council, being able to secure users' data has become a business imperative. To prosper long term, companies that rapidly transitioned to online commerce now must demonstrate to customers that they can be trusted to protect their data online. Organizations no longer have the luxury to simply verify access at the point of onboarding. Instead, they need to continuously authenticate and know exactly who their customers are across channels and throughout the customer lifecycle. Accordingly, according to Javelin's annual identity fraud study, dollars 56,000,000,000 was lost in combined identity fraud and identity fraud scams in the United States in 2020. 39,000,000 American consumers were impacted with a loss per fraud incident of $13.50 Most alarming was that more than half of the consumers victimized by identity fraud experienced total account takeover loss across multiple accounts. These numbers are staggering and validate the significant new The growing usage of digital channels for commerce presents the perfect opportunity for criminals to commit fraud. So we need to come together as an ecosystem and deliver stronger forms of authentication, Javelin recommends, and I quote, Biometric and behavior analytics should be used from beginning to end across digital platforms to help continuously authenticate transactions. Well authenticated identity verification using both passive and active biometrics is primed to solve this problem. Identity verification is rapidly becoming an integral element of most organizations' technology stack, and we believe the next decade of fraud prevention will be defined by an organization's approach to the lifecycle of continuous identity and access management capabilities. Mitek is the only enterprise class provider in the identity category, and our standards of service remain unchallenged. Our approach is to provide advanced linked and layered identity signals from initial onboarding with documents, devices and biometrics to authentication, reverification and continuous identity fraud detection. Our customers globally represent 100 of the world's best known brands and banks, and our proven track record of success continues to grow as we expand our reach into this fast growing market. Mitek's ambition is to be an indispensable partner in fighting identity fraud for the markets and geographies we target and the momentum we are experiencing is evident. Looking forward, our pipeline of potential new customers is strong. Our existing customers are expanding their use of Mobile Verify across multiple use cases and our channel partnerships are gaining traction. As the industry leading solution for identity verification, we are committed to maintaining product superiority and expanding our reach into this large and growing market. We are committed to innovation and delivering products that are simple and intuitive to use, while Mobile banking usage continues to increase every quarter. This quarter, JPMorgan Chase reported 9% increase in mobile banking users to 41,900,000 customers, and Wells Fargo reported active mobile banking customers increased 8% to 26,700,000. Along with this increase in mobile banking adoption, mobile check deposit was rated the most valuable mobile banking app feature in 2020, according to a recent Forbes survey. Similarly, 70% of consumers surveyed by Cornerstone Advisors in 2020 said depositing a check was one of the most important mobile banking features and 85% intend to continue depositing checks using their mobile devices in 2021. As a result of this increase in customer adoption, our highly profitable deposits business continued to grow during the quarter with its revenue increase increasing 18% year over year. Surprisingly, 42% of consumers surveyed used Mobile Deposits for the very first time in 2020, indicating the sizable opportunity for growth and continued adoption And the 7,500 financial institutions that use our mobile check deposit solution are pushing for mainstream consumer acceptance as it represents a significant cost savings for them. So don't be surprised when you see a TV ad featuring Samuel L. Jackson, Charles Barkley and Magic Johnson telling you that using Mobile Deposit is a magical experience. It is. And we look forward to continuing adoption of our deposits product as more and more consumers discover its ease and convenience. In closing, our strong results show the central role that our products play in this digital economy. The acceleration in demand for our identity verification solutions is ongoing, and our record revenue demonstrates how we are strengthening our market position in 2021 and beyond. Now, I'll turn the call over to Jeff to discuss the financial results in more detail. And following Jeff's remarks, we'll open the call up to questions. Jeff, please go ahead. Thanks, Max, and thank you, everyone, for joining us Good afternoon. Let's start with the Q2 revenue and operating results. For the Q2 of fiscal 2021, Mitek generated record revenue of $28,800,000 a 24% increase year over year. Software and hardware revenue was $13,000,000 an increase of 14% year over Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services, was $15,800,000 for the quarter, an increase of 34% over Q2 last year. This increase is due to growth in transactional SaaS revenue, which increased 50% year over year to 11,000,000 The transactional revenue was positively impacted in the quarter due to higher revenues from a few customers with related increased transaction usage. While we are very happy with the significant growth year over year, this revenue may not continue at these increased levels in the next quarter. Also as we look forward, I would point out that Q3 will be our 1st comparable quarter on a year over year basis since the pandemic began. As you may recall, in Q3 last year, we saw significant increases in transaction volumes related to the pandemic, which will impact the comparable growth rates. For Q2 deposits revenue increased 18 We delivered strong software and hardware gross margins of 95% for the quarter. Gross margin on services and other revenue was 80% for the quarter. Total gross margin for the quarter was 87% compared to 86% in Q2 last year. Total GAAP operating expenses, including cost of revenue, were $26,400,000 compared to $22,100,000 in Q2 last year. This increase is due to increased cost of revenue associated with higher revenues and increased expenses due to investments to grow our identity business. Sales and marketing expenses for the quarter were $8,500,000 compared to $6,700,000 a year ago. R and D expenses were $6,700,000 compared to $5,600,000 last year, and RG and A expenses were 5 point Our diluted share count was 44,600,000 shares compared to 42,000,000 shares a year ago. As a reminder, our earnings release includes a reconciliation between GAAP and non GAAP net income. We believe non GAAP net income amortization of debt, discount and issuance costs and the related tax impacts of these items. Non GAAP net income for Q2 increased to $7,300,000 or $0.16 per diluted share compared to $5,400,000 or $0.13 per diluted share a year ago. Our non GAAP adjustments include $3,000,000 of stock comp expense, dollars 1,700,000 of acquisition related costs and expenses, $1,100,000 of amortization of debt discount and issuance costs, dollars 1,600,000 in cash tax difference and $275,000 of litigation expenses for the quarter. This was all offset by the income tax effect of pre tax adjustments of $1,400,000 Turning to the balance sheet. We generated $7,300,000 in cash flow from operations during the quarter and completed a successful convertible debt offering adding approximately $150,000,000 in cash to our balance sheet, bringing our total cash and investments at March 31 to 219,500,000 Our accounts receivable balance of $14,200,000 represents a DSO of 50 days. In closing, We are very pleased with our results, which include record 2nd quarter revenue and non GAAP net income, as well as strong cash flow from operations. We look forward to reporting our continued progress in the coming quarters as we help our customers and partners accelerate their digital transformation, while at the same time mitigating fraud. Operator, that concludes our prepared remarks. Please open the line for questions. Thank We'll take our first question from Bhavan Suri with William Blair. Hi, everyone. This is actually Jake on for Bhavan. I'm just curious interested to hear how you're thinking about capital Allocation given the recent raise, how are you balancing investment in sales and marketing versus the potential for inorganic M and A just given the recent growth you're seeing and ID verification. Hey, Jake. Thanks for calling. Thanks for the question. Yes, I think we just tilted up the convert cash at the beginning of February, so it's still relatively fresh. And we talked about the use of proceeds at that point, primarily focused on acquisition. I think that's kind of number 1 on the list, number 2 on the list, number 3 on the And then you get down to number 4 and it's probably other things within the business, but the top three priorities there would be around acquisition. Awesome. And then just as a follow-up, just curious if there's any update on the CFO search and how the process is tracking? Process continues to roll along. It's a great question and we're very fortunate to have Jeff in a safe set of hands here to help us. We're going through this. I would kind of fit your expectation. We're still probably a couple of months away from getting that fully resolved, but stay tuned. Sounds great. Thanks for taking my questions. Next we'll hear from Mike Grondahl with Northland Securities. Thanks. This is Michael on for Mike. Thanks for taking the questions. Maybe just first on like sales force positioning as we move like towards later half of this year. Is there any thoughts about that Certain industries or use cases where it's generally expected to see a lot of strong growth. Can you just talk about that? Mike on for Mike. Thanks for the question, Mike. Yes, I think we went into this year with a really clear And it was very targeted and focused approach to our go to market, not just domestically, but internationally as well, where we have focused on specific segments, financial services, FinTech, marketplace accounts and then the top targets within each one of those Target accounts, named accounts, both direct and through our channel partners. I don't think we're going to we're halfway through our fiscal year. I don't think you're going to see us Change that, I think as we start to think about next year, we may explore, investigate if there are ways to expand that and Open the aperture a little bit, but premature to premature to kind of be making any predictions on that. Got it. Thanks. And just on Mobile Deposit, is it safe to say that some of that kind of rolls forward the way those contracts are Structured with resellers where the benefit we saw from the last 12 months or so is going to still kind of push forward a quarter or 2? Yes, I'll let Jeff add some comments on how that revenue model works. But yes, I think that The STEMIs and everything that's been issued by the government, I mean that's out there, but we haven't necessarily seen that kind of work its way through the resellers and the core service providers to actually has increased revenue for us yet. I don't know, Jeff, do you want to add to that? Yes. I'd just add, I think you understand the way the contracts work That will flush through the system as they reorder the depleted inventory. I would add though that this quarter we continued to see 20% plus increase in usage over the last year in mobile deposit. That's just on checks being processed. So, it still remains very strong. Now next quarter should be the 1st anniversary again on the pandemic. We'll see how that 1 year lapping impacts that increased check usage next quarter, but this quarter was still strong over 20%. We'll now hear from Hamzah Mazari with Jefferies. Hey, good afternoon. Thank you. Just on Identity on the M and A pipeline, could you maybe size that up and maybe just talk about How your offering is different from some of the bureaus that have done deals like card Mastercard, Decatur, Just talk about sort of the pipeline, how your offering differs and is fragmentation an opportunity in this space for you? Yes, Hamzah, I think you start with the answer right there. Identity is still an early digital identity particularly is an early stage Category is fast growing. It's extremely fragmented. And for the things that we do, we find it to be very localized, meaning the way that identity is validated and then authenticated in different countries is subject to the The local laws. So yes, with so many companies out there having entered the space and so many different approaches, I'm not going to name companies and I'm probably not even going to name categories, but we just think staying close to our customers and taking this market first approach where we've got some of the largest banks in the world and some of the most advanced fast growing fintechs in the world telling us what they're looking for and how they want it laid out, how they want it orchestrated, how they want those signals to work. Are going to use that as our guiding light as to who we should be talking to as far as potential targets for acquisition. Got you. And just my follow-up question, I'll turn it over. On the deposit side, do you have sort of an idea of where adoption sits today. I know you mentioned post COVID there's clearly greater adoption During COVID and maybe post COVID too, but maybe touch on where adoption sits? And are you seeing some of the smaller banks also Increasingly used mobile deposits, I know you mentioned some of the larger names already. Thank you. Yes. Let me take the back half of that question first. Small bank, big bank, community bank, regional bank, credit union, Digital Bank, Big Bank, they all use mobile deposit. That's the 7,500 financial institutions represent The head of the snake and the long tail of the U. S. Financial industry. So everybody, if you want to do mobile deposits, you're showing up with Mitek. The front of that question is a harder one to take on. Before the pandemic adoption, we were being told by The banks that on average the adoption was about for retail checks, the high teens, something like 17%, 18%, 19% of retail checks were being deposited via a mobile device. And then there's been this just there's a lot of information out there around how folks were kind of forced to adopt because branches were closed, so they didn't want to go touch ATM machines. What we don't have a good handle on is, On average across those 7,500 institutions, is that now mid-20s? Is it higher? Is it slightly lower? So I'm sorry not to be able to give you something more precise or with higher confidence. What we do talk about internally when we do our Strategic planning and what our customers have validated for us is there's no reason that over time, the adoption of mobile check deposit should not be At least half of all retail checks, there's just no longer a good reason for that. And I think we've shown that The adoption when forced the adoption can happen pretty quickly. But we'll take the action as we get better information. So we're happy to share it with how that adoption trend continues to mature. Great. Thank you so much. We'll hear from Mark Chappell with Benchmark. Hi, thank you for taking my question and nice job on the quarter. Jeff, starting with you, in your prepared remarks, you noted that some of the 2Q transaction Revenues likely won't repeat next quarter. I just wonder if you could clarify why this revenue is likely not to repeat Why some of it anyways won't repeat? Sure. So in the Q2, we had a handful of customers that just reached higher transaction levels that are more likely to be not repetitive, maybe one time in this quarter. So They may not repeat next quarter. So it was my really the crux of my point there, specific transaction, specific customers. Okay, great. Thanks. And then Max, in the past, you've noted that there may be some opportunities for price increases in Mobile Deposit. I was wondering If that's still an ongoing initiative at the company and then whether you've had any success on that front? Yes. That's a Thanks for bringing us back to that, Mark. Whether it's price increases or just general improved economics within these contracts As they come up for renewal and renegotiation, we've talked about this consistently over the course of the last 7 quarters that we've taken a firm stand on that, not because we're ruthless privateers, but because Our customers are getting a tremendous amount of value from these products. And when those contracts were stood up many, many years ago, in some cases decades ago, The terms were not fair. They just were not reasonable to Mitek. And so, we've continued to prosecute That issue and it's slow but steady work and we review the results of that in our quarterly business reviews every 90 days. And you can see it just nicely it's not a hockey stick, it's just a nice steady trend up into the right and we'll continue to do that. Great, helpful. And then finally here, with respect to your ID business, I was wondering if you saw any strength or weakness in any particular geography? Last quarter, we saw strength in just about every geography. It was a banger of a quarter. I know Jeff touched on some of these one time things, but when you take the really good year we had in FY 2020, The strong quarter we had in Q1 and now an even stronger quarter in Q2, We can feel it. It's there and we're seeing it across geography, across industry. This is a problem that just about every organization And that will conclude today's question and answer session. I will now turn the conference over to Todd Kehrli for any additional closing remarks. Okay. Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day. And that will conclude today's conference. Thank you for your participation. You may now disconnect.