Peter Salkowski - IR Jim DeBello - CEO Russ Clark - CFO.

Bhavan Suri - William Blair Mike Grondahl – Piper Jaffray.

Good day and welcome to the Mitek Fiscal Third Quarter 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Peter Salkowski. Please go ahead, sir..

Thank you, Melissa. Good afternoon, everyone, and thank you for joining us. With me on today’s call are Mitek’s CEO, Jim DeBello; and CFO, Russ Clark. Before I turn the call over to Jim and Russ, I’d like to cover a quick few things. This afternoon, Mitek issued a press release announcing its third quarter of fiscal 2015 fiscal results.

That release is available on the company’s website at www.miteksystems.com. This call is being broadcast live over the Internet for all of the interested parties and the webcast will be archived on the Investor Relations page of the company’s website.

On today’s call, we 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 our 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 for a more complete description of these risks.

Our statements on this call are made as of today, July 23, 2015 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, for any reason.

Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today’s earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release.

I’ll now turn the call over to Mitek’s CEO, Jim DeBello.

Jim?.

Thanks, Peter and good afternoon, everyone. Today, Mitek reported GAAP net income of $917,000 on record quarterly revenue of $6.4 million, resulting in 38% year-over-year revenue growth. This was our 10th consecutive quarter of year-over-year revenue growth and our fourth consecutive quarter, in which we delivered GAAP profits.

Our products are broadly adopted by the top banks in the world including the top-10 U.S. retail banks. Mobile Deposit continues to dominate the market and now surpasses over 4,000 banks who license our technology.

In addition to our strong third quarter performance, in June, we closed the acquisition of IDchecker, a global provider of cloud-based identity document verification and facial recognition solutions. This is our first acquisition.

It increases our recurring revenue, expands our markets globally and diversifies our technology with authentication and facial recognition.

I'd like to begin our call today by discussing the progress we’ve made with our best in class mobile capture products, followed by how we are using the success of Mobile Deposit to solve additional problems businesses face in the mobile channel.

Given that this is the first earnings call since we announced the acquisition, I will also provide more details on IDchecker’s business. Last quarter we talked about expanding the scope of our business globally by leveraging our dominant position in mobile capture technology. Mobile Deposit continues to grow. We added another 400 banks this quarter.

With 4,105 banks now signed, we estimate that more than half of all the banks in the country have licensed our technology and that over 15 million consumers now use Mobile Deposit. We believe that our mobile capture technology has become mission critical to banks.

As I discussed in our last earnings call, we plan to use the success of mobile deposit to expand Mitek's business into other mobile capture opportunities, specifically the multi-million dollar identity verification and authentication market.

While we continue to invest in Mobile Deposit and expand its market penetration, our acquisition of IDchecker expands our ID product offering and firmly establishes Mitek as the leader in the growth market for mobile identity verification and more than doubles our addressable market.

With an established industry brand and deep market penetration, Mitek is uniquely positioned to deliver these value added products that command higher selling prices. Let me elaborate. For many companies, attracting and acquiring new customers on a mobile device or tablet represents an untapped opportunity.

According to the latest comScore data, over 90% of millennial own smartphones.

And this next generation of customers prefer mobile access for their lifestyle, yet the process of opening a bank account, applying for a credit card, or purchasing products using a mobile device is still cumbersome, often requiring a customer to use a tiny touch screen keyboard to enter personal information from a driver's license.

As result, only 50% complete the process. Our mobile capture technology provides a superior user experience that increases customer satisfaction and improves completion rates.

While developing our groundbreaking mobile deposit, we've also been pioneering the best-in-class mobile capture products to help businesses improve their customer acquisition processes via the mobile channel.

Photo Fill, formerly known as Photo Account Opening, allows a customer to pre-fill a form with personal data quickly by snapping a picture of the US driver license using our simple MiSnap user experience, saving time and reducing customer friction.

Photo Fill is designed to be integrated into our customers' downloadable apps, but our newest version of Photo Fill is designed for the mobile web and makes the mobile application process even easier. Until the advent of Photo Fill from mobile web, opening an account or receiving a quote for most companies was a hassle and time consuming.

The consumer needed to download the company-specific app on his or her device before proceeding. Mobile web allows a consumer to complete an application process directly from the mobile browser, eliminating the need for a company-specific app and addressing of very specific pain point in the mobile channel.

We've also announced Photo Verify, this is another groundbreaking product, it instantly finds and decodes an encrypted security feature hidden on a driver's license and imperceptible to the human eye, when the security feature is detected by Photo Verify, the license is confirmed to be 100% authentic resulting in zero false positives.

The authenticity of the ID can be verified entirely on a mobile device eliminating the need for customers or applicants to appear in person. Now, whereas Mitek offers our solutions on premise at the customer's location, IDchecker offers its products through a hosted cloud environment.

The combination of which provides the customer with powerful options. Based in The Netherlands, IDchecker offers some of the most innovative identification verification solutions on the market for global customers in payments, financial services, and information services.

In addition to product synergies, IDchecker's international presence offers cross selling opportunities with Mitek’s mostly North American based business. Its flagship product Strong ID allows customers to upload their documents with the mobile devices they use every day.

Strong ID authenticates 3,500 different types of passports, international driver's licenses and identity cards from nearly every country in the world.

Strong ID can be combined with IDchecker's facial recognition technology enabling an organization to confirm the authenticity of a document and match it to the person presenting it during a mobile transaction. And by using Strong ID, businesses can dramatically improve mobile customer acquisition, while meeting stringent compliance requirements.

Before the introduction of Strong ID, a customer was required to provide a manual proof of address or photo ID, Strong ID changes all that, thanks to its user friendly mobile capturing tool and fast ID document verification.

It's an easy to use mobile solution that safeguards a customer's privacy leading to higher customer satisfaction, less fraud, and higher conversion rates. Consumer preference for shopping and opening accounts via the mobile channel is not just a U.S. phenomenon; it's a rapidly growing worldwide trend.

IDchecker combined with Mitek is an excellent strategic pairing leveraging our individual product portfolios and rich pipelines.

IDchecker's Strong ID combined with Mitek's Photo Fill and Photo Verify products provide an arsenal of mobile identification options that are optimized for today's digital sales and significantly improved customer acquisition rates by verifying ID documents on a worldwide basis using a camera.

We believe that the combined technologies are extremely valuable to enterprise customers and are capable of doubling or even tripling the yield from their digital customer acquisition efforts via the mobile channel.

Last quarter, we cited a study completed by the firm MarketsandMarkets, which estimated the total market for multi-factor authentication was $10.7 billion. With the combination of IDchecker, we conservatively estimate that our mobile identity products address $1.6 billion of this market.

This is based on the verticals that we currently serve, including financial services, insurance, and telecom. We believe that this market will continue to grow rapidly. For example, a large property and casualty carrier told us that their volume of insurance quotations through the mobile channel now surpasses their call center.

Another large carrier completes 40,000 quotations a day on mobile. Two years ago, it was less than 5% of that. In addition, we believe that our addressable market could double if we include markets that have similar characteristics such as government, services, commerce, and travel.

The future looks very bright as we continue to build momentum and combine our Company with IDchecker's offerings. At Mitek, we've always been passionate about reducing customer friction in the mobile channel.

While this started with Mobile Deposit, we're writing the next chapter for Mitek by providing break through mobile capture innovations that benefit customer acquisition. We're very proud to welcome the IDchecker team to Mitek.

The combination with IDchecker leverages our success with Mobile Deposit, adds a sizable recurring revenue element to our business in the cloud and expands our opportunities globally in a large market.

And with that, I’ll turn the call over now to Russ, our Chief Financial Officer for a more detailed review of our quarterly results and annual guidance.

Russ?.

Thanks, Jim. Hi, everyone and thank you for joining us on today's call. As a reminder, all financial figures I cite today are on a GAAP basis, unless I specifically call the number as non-GAAP. Our earnings release includes reconciliation between these two measures.

We believe that excluding the following items from non-GAAP net income provides a useful measure of the company’s operating results, acquisition related costs incurred to complete a transaction, acquisition related expenses for amortization of intangible assets and stock compensation for shares issued in the deal, litigation costs and normal stock compensation expenses.

Also as a reminder, June 30th is the end of our fiscal third quarter. So any quarters that I note will be on that basis. As Jim mentioned, Q3 total revenue was a record $6.4 million, representing a 38% year-over-year increase and Mitek's first quarter with revenue over $6 million.

In addition, Q3 non-GAAP net income of $2.2 million or $0.07 per diluted share represents our fifth consecutive quarter of non-GAAP net income. Q3 software revenue of $4.7 million included 10 Mobile Deposit reorders, which fueled a 47% increase compared to year earlier revenue of $3.2 million.

Q3 services revenue of $1.8 million increased 19% over last year's Q3 revenue of $1.5 million. We continue to benefit from consistent growth in our maintenance stream, primarily as a result of growth in the Mobile Deposit base.

The IDchecker acquisition closed on June 17th, resulting in IDC contributing to Mitek's results for only the last 13 days of the quarter. As a result, the impact on Mitek's third quarter results was small. Total Q3 operating expenses were $6.1 million compared to $6.3 million in the year ago period.

Lower selling and marketing, research and development, litigation and stock compensation expenses were mostly offset by costs and expenses related to the IDchecker acquisition.

Q3 selling and marketing expenses were $1.6 million compared to $1.8 million in the year ago period, while R&D expenses were $1.4 million in Q3 compared to $1.6 million in the year ago period.

Our Q3 G&A expenses were $1.8 million, down from $2.3 million in the year ago period, due primarily to a year-over-year decrease in litigation spending of $510,000.

We incurred $736,000 in costs and expenses in Q3, related to direct costs for the acquisition of IDchecker as well as amortization of related intangible assets and acquisition related stock compensation expenses for the last 13 days of Q3. Non-cash stock compensation expense during Q3 was $810,000 compared to $923,000 in the year ago period.

In Q3, we recorded a net tax benefit of $578,000, related primarily to the release of deferred tax asset valuation allowances in connection with the acquisition of IDchecker. GAAP net income in Q3 was $917,000 or $0.03 per diluted share compared to a net loss of $1.6 million or $0.05 per share in the year ago period.

As I mentioned, Mitek reported non-GAAP net income of $2.2 million or $0.07 per diluted share for the quarter, compared to non-GAAP net income of $139,000 or breakeven per diluted share for Q3 of 2014. Our diluted share count for Q3 was 31.6 million shares. Now, turning to guidance.

We expect revenue to be between $23.5 million and $24.5 million for our fiscal year ending September 30, 2015. Our increase in guidance is based on a full quarter of revenue contribution from IDchecker as well as a continued growth in Mobile Deposit.

We expect Q4 OpEx to be between $5.25 million and $5.75 million, excluding all of the add-backs down in our GAAP net income reconciliation table attached to the earnings release.

As a reminder, these add-backs are acquisition-related costs incurred to complete the deal, acquisition-related expenses for amortization of intangible assets and stock compensation for shares issued in the deal, litigation costs and normal stock compensation expenses.

We expect Q4 acquisition-related cost to be around $100,000 related to deal wrap up, acquisition-related expenses to be in the range of $500,000 to $600,000, litigation cost to be in the neighborhood of $300,000 to $400,000 and stock compensation expense to be approximately $800,000 to $900,000.

And I like to point out that Q4 OpEx will include a full quarter of IDchecker operating expenses. Turning to the balance sheet. At the end of Q3, cash, cash equivalents and investments totaled $24.7 million compared to $28.2 million at the end of Q2.

During the quarter, we deployed $5.6 million of our cash to acquire IDchecker and generated $2 million of cash from operations.

Our accounts receivable balance of $3.8 million represented a DSO of 54 days for Q3, which is slightly higher than last quarter’s DSO of 47 days due primarily to the effect of adding IDchecker receivables near the end of the quarter.

Finally, we recorded intangible assets of $6.4 million related to acquire technology, customer relationships, trade names and goodwill related to the IDchecker acquisition. That concludes our prepared remarks. Operator, please open the line for questions..

Thank you. [Operator Instructions] And our first question will come from Bhavan Suri with William Blair..

Hi, guys, can you hear me okay there, Jim?.

Yeah, okay, Bhavan..

Great. Congrats, nice job on the quarter there.

As you look at the business, Jim, I’ll start off with just a high level question, you’ve talked about using the combination of your technology, IDchecker, for a lot of account opening type applications and ID verification, but obviously the concept of ID verification can be applied much, much more broadly and I guess it makes sense to approach the guys that are customers, meaning the bank and use cases there, but if you would have think sort of five years out a little bit and say, what would kind of common use cases you can see IDchecker outside of account opening, which is a most logical one.

How do we think about that opportunity?.

I think it of as a high growth opportunity. First of all, Bhavan, we services financial service industry, banks, primarily community banks, credit unions and we’re cross-selling to them already our Photo Verify, sorry Photo Fill product.

In addition to that, we have closed deals with some of the larger insurance companies and property and casualty carriers and we also have a deepening pipeline primarily in those verticals and that would include telecom as you know from the past. So, we’ll continue selling that. There is a big, big opportunities for Mitek.

What IDchecker provides is a way to take our products internationally and also be able to leverage their pipeline in the US and they do have some large customers as well.

So, as we look beyond financial services, insurance, property and casualty, there are opportunities we believe in areas such as government services such as e-commerce, travel, anywhere where identity is provided as a proof of your personal information or for application we think is a valid opportunity for us.

However, from a sales perspective, we want to keep focused at this stage and extend naturally. So, we are working very hard on streamlining our sales processes to make it easier to utilize our technology, both in a web or browser form or on-premise through an online approach.

So the addition of IDchecker not only adds coverage globally, it adds a cloud based solution, which open up new avenues for us. So that plus our on-premise solutions that we currently offer, we think it’s a very, very powerful one two combination. .

Got it. And it leads me to my next question – the next question quite nicely. Two things, first, just an update on the Mobile Photo Fill and Mobile Photo Verify.

And then are the web products available there with Chrome and Safari, because at our call, we discussed having those available a little while ago, are those available yet?.

Yes, they are. .

And have any of the companies implemented the technology, say in beta or any that are live yet using the Photo Fill, Mobile Photo Verify on the sort of the web implementations, the Chrome, Safari implementations?.

We do have several companies in their current beta or implementation processes. .

And are they generally financial services still in terms of industry? And then if you could remind us the economics of these products again vis-à-vis say, Mobile Deposit. .

The economics are richer, order of magnitude in many cases beyond what we are seeing in Mobile Deposit, so we think these are higher value added products. Secondly, they are primarily in financial services and property and casualty insurance, but I also would expand that into telco. .

Okay. .

Yeah, anywhere if a customer applies for a financial service, a telephone, or for other types of quotations for insurance, that is a natural target for us and we are addressing those three primary markets. .

Got it. And then pricing Jim again or how you charge. .

Yeah, we do charge similarly in a transaction based recurring model. .

Got it. And then when I compare to mobile check deposits sort of -- what sort of multiple would you say we get on average for Photo Fill et cetera versus the mobile check deposit. .

Hey, Bhavan, it’s Russ. As Jim said, we are seeing from some of that photo account opening deal that we have done, ASPs that are higher historically than deposit. And there is a range as well, a Photo Fill transaction we would expect to have a price point that’s south of Photo Verify, which is additional features and functionalities there.

So as you move up the value chain, the Photo Verify, we’d start out generally higher than deposit and it would increase from Photo Fill up to Photo Verify. .

Got it. That’s helpful. And then just one sort of more and more housekeeping question here. But Jim, you know in the past, you have typically sold stock at the end of the year to pay tax and options expire in the fall. I mean, it feels like your 10b5-1 plan has got a better strategy to manage this process this year.

Can you just help us understand and confirm even whether that 10b5-1 plan is to pay the tax and the options to expire in October? So this is not sort of – what I want to understand is sort of the clarity between your ownership versus just the tax payments and I want to just make sure we got that clear on our model as well..

No, it’s fine, Bhavan. The options that I have now through the 10b5-1 plan are expiring this year, I have been at Mitek for over a decade and the option plan is limited to 10 years.

So I am in a position where I have to move a limited number of shares, but that no way reflects any lack of commitment to the company because the personal position I have in this company is as one of its largest shareholders and that will continue.

So I am committed to the company, we are growing, what I am doing is simple housekeeping with regard to expiring options. .

And how many do expire in October Jim, you gave us a number?.

I believe the number was 200,000 in that range. .

Okay, helpful. Thanks guys. Thanks for taking my questions..

You bet. .

Thanks, Bhavan..

Our next question will come from Mike Grondahl with Piper Jaffray..

Hi, thanks guys and congratulations on the quarter. .

Hi, Mike..

Any underlying trends in Mobile Deposit, whether it’s a sort of volume per bank customer or volume per bank, if you will, or you see any uptick?.

Then answer is yes. Mike, this is Jim. First is an uptick in number of new banks signed, 400 this last quarter. That continues at that pace, but has not abated. Second, we also see increased usage quarter-over-quarter in the double digits and that continues. So we believe that this product has become part of the mobile banking vocabulary.

It is both important for banks financially to reduce their cost and have a high catch with their customers, so they are committed to it. We haven’t lost a single customer. We have 100% retention. Separately, and also positively, this has become part of the consumer experience.

People enjoy taking a photograph of their check to deposit, it saves them having to wait in line. So the fundamentals of the product continue to grow with regard to new banks signed, more customer usage and we are continuing to see activity in the commercial as well as retail world..

Got it.

And did you mentioned how much revenue from IDchecker you had in June quarter?.

No, Mike, I didn’t. I did make a comment that since the acquisition was only 13 days before the end of quarter, it was a small impact on the financials for the quarter..

Got it. Okay.

And then in the mobile capture area, any thoughts on how we should kind of track that process between now and 2016? Is it customer wins, is it transactions, the revenues? What will you be sort of disclosing over the next couple quarters?.

Yeah. I think, Mike, when you look at metrics on that, I appreciate the question there. So we do have, as we mentioned, and as you asked, the Mobile Deposit business, which continues to grow nicely, is fueling the lion's share of the revenue growth. As we look forward to mobile capture applications, those are recurring pricing model.

So, although, we expect to see higher ASPs there, the recurring model for the revenue will ramp little more slowly perhaps than we’ve seen in the past with Mobile Deposit. That being said, I think customer wins will be important to announce. We get into – our aim here is to sign multi-year committed deals.

So that should put us in a position to release bookings numbers to back up the revenue numbers from those products as well. So I think it’s going to come down to customer wins and the bookings on top of that in the early days as the revenue grows and becomes more significant to report..

Got it.

And then just lastly, I just wondered if I – I think you guys said 5.25 million to 5.75 million and it was excluding those add-backs that you mentioned?.

It is Mike. All of the add-backs that we have on non-GAAP reconciliation were excluding and it’s a little different presentation. We have a few more line items now with the acquisition-related costs and expenses. So, just take -- clean them all the side and saying, here is what I expect, the organic OpEx plus IDchecker to the -- for Q4..

Got it. Thanks a lot..

And that does conclude our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Peter Salkowski for any additional or closing remarks..

Thank you, Melissa. I’d like to inform everyone that Mitek management will present at the Needham Interconnect Conference on August 5 in New York City. Thanks for your interest in Mitek. Everyone have a great day..

Once again, that does conclude our conference for today. Thank you for your participation. You may now disconnect..