Todd Kehrli - President, MKR Group Jim DeBello - Chairman, President & CEO Jeff Davison - CFO.

Bhavan Suri - William Blair & Company Darren Aftahi - ROTH Capital Partners Mike Grondahl - Northland Securities Ilya Grozovsky - National Securities.

Good day, everyone. And welcome to the Mitek Third Quarter Fiscal 2018 Financial Results Conference Call. At this time, I would like to turn the call over to Mr. Todd Kehrli, MKR Group. Please go ahead..

Thank you, operator. Good afternoon and welcome to Mitek’s fiscal 2018 third 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 third quarter fiscal 2018 financial results. That release is available on the company’s website at miteksystems.com. This call is being… [Technical Difficulty].

…and at the same time, we achieved our 18th consecutive quarter of non-GAAP profitability. The rapid erosion of trust in the digital world and the need to rebuild that trust is greater today than ever before.

Much of the traditional personal data used for verifying identity such as social security numbers or even knowledge-based authentication questions have been compromised. And there is now a need and an additional urgency for a better ID solution as a direct result of increasingly stringent regulations that carry big penalties for non-compliance.

The solution to this problem in the digital domain is the same as in the physical world, it’s the use of physical documents issued by trusted authorities. That means government IDs.

Because they are issued by recognized authorities, government issued identity documents such as a driver license and passport are still the strongest source of identity verification online for us.

These physical documents will continue to be the cornerstone of identity verification and we believe nothing can beat them for establishing trust in digital transactions. Mitek’s ID solutions bridge the gap, between the physical and digital worlds for identity verification.

And we established the trust for transactions that is needed right now to keep the digital economy humming into the next decade.

For Mitek, the need for proven identity and trust in the digital world plays in our favor, as our innovative solutions provide a proven, friendly experience and combine what you have, meaning the physical government 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 secured digital experience today.

As part of our strategy to further build our leadership position in digital identity verification, this past May, we made our second acquisition of the year with the addition of A2iA, a global leader in artificial intelligence and imaged-based analysis located in Paris.

A2iA 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 different languages.

Using these algorithms, we’ll be able to verify government ID documents more quickly and accurately, further improving our already industry-leading identity verification solution.

Also, A2iA brings to Mitek handwriting and cursive recognition and optical character recognition technology which will help solidify Mitek’s leadership position in Mobile Deposit and make Mitek the global standard in check imaging across all channels, including mobile, RDC, ATM and branch.

In fact, following the acquisition, we announced Mobile Deposit Version 4.7 which integrates A2iA’s award-winning artificial intelligence and machine learning-based software, check reader, into Mitek’s flagship product.

This newest version features A2iA’s cursive and printed text recognition to help reduce deposit fraud that cause financial institutions millions of dollars every year. I mentioned earlier that we set a record for both the number of new ID customers signed direct and through channel partners within a single quarter.

Let me quickly highlight a couple of our new identity customers and why they chose Mitek’s identity verification solution. One notable win was with a new online banking division of one of the world’s largest and most prominent investment banks that provides both personal loans and saving accounts direct to consumers.

They will be using Mobile Verify to enhance their digital lending process by enabling consumers to get loans faster, while decreasing fraud with ID document verification.

Another new financial services customer is a global financial institution that offers banking services to over 37 million retail and wholesale banking customers in over 40 countries. They will be using Mobile Verify to facilitate and improve their new customer onboarding process.

Another new ID customer is a financial services holding company that operates over 2,100 branches in 15 states and offers consumer and commercial banking to millions of consumers. They’ll be using Mitek to transform their online account opening process.

We also added a new alternative financial service provider, such as DXE, a new cryptocurrency trading platform and BTC Direct a cryptocurrency broker, both of which we announced in recent press releases. And during the quarter, we also signed a new customer that offers online personal loans, primarily to payback credit card debt.

They will be using Mobile Verify and Face Compare with our Mobile Web SDK to reduce fraud and replace their current manual review process for ID verification. We also added several new customers outside of financial services during the quarter. These include an interesting company that’s reinventing the car buying experience.

Their platform enables you to list your car or browse for used cars and then allows an employee to bring you the car for a test drive. If you choose to buy, they facilitate the paperwork including all of the DMV forms. They’ll be using Mobile Verify to facilitate this process.

All of these wins were competitive deals where Mitek was selected over the competition. A number of our ID wins during the quarter came through our channel partners that include Experian, Evoqua and Artilium.

By reselling and integrating our identity verification technologies with partners, we are accelerating the expansion of our identity solutions into key vertical markets. One example of a partner win came from Artilium. They will be providing a mobile virtual network operator in Europe, a KYC system using Mitek’s digital identity verification solution.

This company currently has 650,000 customers and is expecting over 40,000 new registrations every month. We’re working on multiple identity verification used cases with this company that have driven by regulation to prevent terrorist activities. During the quarter, we singed several new ID partnerships.

We’re seeing tremendous interest in partnerships from biometric authentication providers who want to use Mitek’s identity verification solution to identity proof the person who is creating the biometric for ongoing authentication. We signed our first biometric U.S. partner agreement with the leading player BioSig-ID during the quarter.

The momentum we are seeing in ID is evidenced by our record setting number of new ID customers this quarter, highlights the fact that enterprises around the globe are seeking solutions to enhance identity verification and regain trust in the digital world.

We’ve created trust in the mobile check deposit market and now Mitek is focused on enabling trust for companies transacting business in the digital market. With our growing list of 47 patents and 20 pending, we believe we have the right AI technology and solution.

And with our history of successfully serving over 6,100 financial institutions that we are well positioned to address the need for digital trust in the multi-billion-dollar digital identity verification market. And now with that, I’ll 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. For the third quarter of fiscal 2018, Mitek generated record revenue of $16.1 million, a 37% increase year-over-year. Software and hardware revenue of $10.5 million was up 40% year-over-year.

The increase in software and hardware revenue was due primarily to the addition of ICAR and A2IA and growth in Mobile Deposit. We maintained strong software and hardware gross margins at 90% for the quarter. SaaS maintenance and consulting revenue was $5.7 million for the quarter, an increase of 30% over last year’s Q3 revenue of $4.3 million.

This increase is due primarily to growth and transactional SaaS revenues for our mobile identity products, which increased 31% to $3.1 million from $2.4 million in Q3 a year ago. Year-to-date, our ID revenue has grown 66% year-over-year, highlighting our momentum in the market. And the SaaS component of revenue was up 69% year-to-date.

SaaS maintenance and consulting gross margin was 71% for the quarter. This was down from 78% last quarter, due primarily to increased personnel and hosting web services costs related to the delivery of our solutions. Total GAAP operating expenses, including cost of revenue were $19 million compared to $11.3 million in Q3 last year.

The year-over-year increase in operating expense reflects our continued investments to grow our identity business, an increase in acquisition related costs, as well as the addition of operating costs associated with our acquisitions of ICAR and A2iA. Sales and marketing expenses for the quarter were $5.7 million compared to $3.5 million a year ago.

R&D expenses were $4.2 million compared to $2.7 million last year and our G&A expenses were $3.2 million compared to $3.4 million a year ago. GAAP operating expenses include $3.2 million of acquisition-related costs compared to $630,000 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 third quarter was $2.8 million or a loss of $0.08 per diluted share attributable to one-time acquisition-related costs. Non-GAAP net income was $2.1 million or $0.06 per diluted share, representing our 18th consecutive quarter of non-GAAP net income.

In Q3, our non-GAAP expenses exclude $4.4 million of acquisition-related costs and expenses.

This includes a one-time charge of $1.3 million related to foreign currency exchange re-measurement on the Europe for the A2iA acquisition, $1.1 million amortization of intangibles, a one-time charge of $1 million for A2iA personnel termination costs and other transaction costs. Stock comp expense was $2 million compared to $1.6 million a year ago.

Our diluted share count was 38.1 million shares compared to 35.6 million shares a year ago. Turning to the balance sheet, during the quarter, we generated $600,000 in cash flow from operations and we used $26.8 million net for acquisitions, bringing our total cash and investments to $18 million at the end of Q3.

Our accounts receivable balance of $12.1 million represented a DSO of 56 days. Now moving to guidance. We are reiterating the annual guidance we provided on May 23, which is for annual revenue to be between $62 million and $63 million for our fiscal year ending September 30, 2018, representing growth of between 37% and 39% year-over-year.

We expect the payments business to grow between 15% and 20% and the ID business to grow 65% to 70% for the full year.

We expect to generate a non-GAAP profit margin of between 15% and 16% for the full fiscal year 2018 as a result of the increased operating expenses associated with the A2iA acquisition, as well as the impact of the purchase accounting treatment on A2iA’s revenue.

As we’ve stated before, we expect our non-GAAP operating margins in fiscal 2019 to return to 19% to 20% as we move beyond the purchase accounting treatment. We expect Q4 operating expense excluding acquisition-related costs and stock comp expenses to be between $15.7 million and $16.2 million.

We expect acquisition-related costs and expenses to be approximately $2 million and stock comp expense to be approximately $2.2 million for Q4. Operator that concludes our remarks, if you could open the line for questions..

Thank you. [Operator Instructions] We’ll take our first question from Bhavan Suri with William Blair..

Good afternoon.

Can you guys hear me okay?.

We sure can, Bhavan..

Great, great. Thank you, guys and congratulations. Just another solid quarter there. That was very exciting. Nice job. I guess, Jim, I just wanted to touch first a little bit on sort of the -- when you look at the biometric capabilities and ID verification sort of a little more color on where you are in terms of that.

There was an announcement in May, this was [ph] doubled by Experian. I guess has this solution [ph] driven by Experian.

Sort of how large can we expect the financial impact to be?.

Bhavan, I’ll answer it in two ways, first of which is the product is live and generally released. It is being deployed by certain banking customers in certain global markets and it has been successful in onboarding customers. The process for everyone’s information is to take a photograph of your ID that would be either a driver license or a passport.

In the instance of the driver’s license, front and back then you would take a selfie. And that system -- our system, Mobile Verify instantly compares that to the photograph on the ID either a passport or a license. We sell that product directly through our direct sales force and independently through channel partners. You mentioned Experian.

We have integrated our product into the Experian platform. That platform is called CrossCore. And they are actively pursuing customers as we are separately. And we are assisting them as necessary in the field as well as they get up to speed with the capabilities of our Mobile Verify solution. So, it is live, it does work, and is being deployed..

Great, great. That’s actually really helpful, Jim. Thanks. And then I guess the other question I had is, we’ve discussed this in the past about sort of the focus on financial services and sort of your ownership of that space, of that vertical, but I’d love to sort of understand sort of progressing outside financial services for ID.

When you look at vertical expansion from a go-to-market perspective, as you think about that, is that a channel-based approach the way you did with Experian or is it a combination of channel direct? Just sort of how that’s progressing and how the go-to-market will play out a little bit?.

Just as we have done with Mobile Deposit, we’ve taken a very disciplined approach to our go-to-market strategy. And we have established, as you know, in the Mobile Deposit market over 6,100 financial institutions, primarily in North America.

We also are global to a degree that checks are prevalent in other countries, for example large bank in England, albeit the check volumes are low outside of North America. Similarly, we are able to cross-sell those customers into our Mobile Verify solution as we are a trusted partner. And I can’t emphasize that enough.

We have the credibility and the experience working with large enterprise customers. We provide them the security that they require, we provide them the balance sheet that they require and the thought leadership with regard to identity verification as a replacement for what they have traditionally used in knowledge-based authentication.

That’s our beachhead market, Bhavan. In addition to that, we have discovered through opportunities that have come to us. So, we have pursued adjacent markets.

So, our disciplined approach to cross-sell, our existing vertical markets and dominance with deposit in financial services leads itself for us to move laterally into other adjacent markets, some of which are very, very large.

For example, we’ve talked a lot about shared economy and marketplaces and you have participated perhaps personally in those markets.

When you get a lift, when you get a Airbnb rental, when you get a other type of service and caring for anybody within your family or even your pets, all of which requires a trusted relationship between the consumer and the provider. And again, in a digital world, it makes it more complicated because typically you don’t see that provider.

And so, what we do, we replicate that physical workflow that traditionally we used to have across the table with the provider and now we provide that digitally through capturing the ID, verifying the authenticity of that ID and even going further into verifying its originality and its validity on that ID.

That goes a long way of establishing the trust allows us to sell into adjacent markets. So, we again want to leverage our success in the marketplace with financial institutions and that’s a fairly broad category that includes lenders, payments processors, it includes banks, it includes other types of financial institutions both digital and physical.

But we can also go into adjacent markets based on that success and credibility into marketplace and shared economy customers..

Got it. Got it, Jim. That was great. One last one for me. So, I want to touch on sort of the ID verification space sort of the really high growth sort of accelerant here. As you look at existing customers, you sell into them, I’m not just understanding the cadence of expansion.

Is that sort of a linear function as they rollout, do you see step function, does they add new applications? How should we think about sort of that layering that in over the next 12, 24, 36 months within the base where you sold to and how they might expand within that both from a used case perspective and a usage perspective?.

Yeah. As Jeff will tell you, a 100% of our bookings are in the cloud as we move forward and transform this company into a cloud-based provider and that really has great advantages to our enterprise customers. They can benefit from the expertise that we create from seeing millions of documents each month and that number is growing.

So, those transactions are a benefit to the entire community who utilize our platform. So, as we look forward to -- as we expand, we clearly see the opportunity of moving into these new customers, primarily in digital onboarding and secondarily in compliance and governance and we help these customers with their workflows.

And once we get established, we also can cross-sell into other divisions within the same institution. So, there is lift internally, not just on the core transactions from the primary touchpoint but moving within the enterprise into other divisions which also have similar identity verification needs.

Again, the key secular trend that we’re leveraging is not only the growth in mobile devices and digital, but it’s also the growth in consumer habits as they conduct more of their transactions online and remotely..

Yeah. That’s just a great secular tailwind. Thank you, guys. Thanks for taking my questions and really nice job. Thanks..

Thanks, Bhavan..

We’ll go next to Darren Aftahi with Roth Capital Partners..

Hey guys, good afternoon. Thanks for taking my questions. Just a few if I may.

First on, can you quantify the number of ID customers in the quarter? And then secondarily, just talk about the mix of those customers that came via direct versus channel?.

Hi, Darren. So, we haven’t really given out the number of ID customers. We’ve shared with you that we’re in the triple digits. What I’d say is this was a really strong quarter for ID, we’re very pleased with the number of customers we signed. As to the make-up, we’re still seeing a lot of strength in the financial services.

So, in excess of half, maybe even close to two-thirds, we’re in the financial services related vertical whether that be banking, payments, cryptocurrency, we lump all that together in lending. And then the others would be scattered amongst the other verticals that we typically talk about..

Got it. And then one more.

What was A2iA’s contribution in the quarter for revenue?.

The A2iA revenue in the quarter was $600,000. So, not a significant piece of revenue. And as you know, we only had like six weeks of them in the quarter. And then we have the deferred revenue impact from the purchase accounting.

So, we’ve figured that that amount of deferred revenue that was on their opening balance sheet that we’ll probably lose, or we will lose and not get to recognize over the next year or so, approximately 30% or so of the historical annual revenue..

That’s helpful. On your SaaS transaction revenue, it looks like it ticked down modestly sequentially. I was just curious if you could talk to that? And then just last one from me, my line kind of broke up.

If you could go through the details on your guidance, not all of it, but post your commentary about the net margins you’ve reiterated sort of stock comp and OpEx will be helpful? Thanks..

Sure. Yeah, sequentially the SaaS revenue is down slightly. However, year-over-year we’re up 31% and year-to-date it’s up 69%. So, if you look back the previous two quarters that number was up real strong, and ID was up real strong and our guidance for the year is that ID is going to do 65% to 70% growth.

So, we anticipated a little bit slower growth of the ID business in Q3 and Q4 just due to that. And if you look back last year, the move from Q2 to Q3, there was a pretty nice jump in that. And so, I think that increase in numbers, the growth on those numbers is bringing that percentage growth down a little bit.

That being said, there was seasonality that benefitted us last quarter with the few of our SaaS customers and this quarter we’re seeing a little bit of seasonality that didn’t benefit us. So, there is a little tick down in a couple of customers due to something going on in their business that just was less transactions.

We had one partner, a large partner of ours lost one customer. So, we did have one customer churn and there is a little bit of impact in that as well.

Beyond that though, we’re really confident in the SaaS number, we’re confident in the ID growth and we’re pleased to stick to the guidance that we’re expecting for the year and look forward to getting the huge number of new customers signed, get them live and generating revenue.

You wanted to know specifics on the expense guidance?.

Yeah. Just talk about stock comp and OpEx, my line kind of broke out there.

If you could repeat that it would be great?.

Sure. So, the acquisition-related costs and expenses should be approximately $2 million. And the stock comp expense about $2.2 million..

Okay.

And did you guide to OpEx at all in the quarter?.

Yeah. That one we said 15.7 to 16.2..

Great, thanks. Congratulations..

Sure. Thank you. .

Thanks, Darren..

We’ll go next to Mike Grondahl with Northland Securities..

Hey, thanks guys.

Anything to call out on Mobile Deposit that was interesting in the quarter?.

Yeah, I think so, Mike. Thanks, and that’s a good question. Happy to report that the final large bank has deployed MiSnap that would be JP Morgan & Chase. They went live actually with the use of our auto capture MiSnap, which is used by over 80 million consumers and is a superior capture experience. We think this is a core differentiator for Mitek.

And we’ve been developing this product. We consider it finally tuned for the iOS and Android operating environments. And if you ever used it in depositing your checks, you know how magical that experience is. If you think about Mitek, we really are providing a unique and very beneficial consumer experience.

MiSnap is at the top of the pyramid with regard to the capture experience, which results in highly accurate images, which improves our accuracy in terms of our results that we return to our financial customer. So, that I think is material.

In addition to that and very happily so, we’ve also added additional customers who are working with us in the charitable giving arena. We’re involved with the Pan-Mass Challenge. This is the largest single charitable event in the nation. It’s a long-distance bike ride that happens in Massachusetts.

And we have discovered and so have the charitable organizations that often the checks that are provided to them through individual contributors and people who are sponsoring either teams or what have you often don’t get deposited.

So, what these institutions have done is created their own app where they enable their donors to download the app and directly deposit their donations into the Pan-Mass Challenge bank account. We think this is a big addition to helping individual donations and charitable giving organizations.

But we just like the fact that people love that capture experience so much that’s being proliferated as we speak..

Got it.

And what one or two things would you sort of call out as the driver for like the record number of ID customers signed?.

Well, I think there are several drivers. We’ve heard explicitly, Mike, in my meetings directly with customers and I spend a lot of time in the field.

The customers and these financial institutions that once had confidence in their traditional systems of knowledge-based authentication what’s called KBA, who depended on social security numbers, they’ve all are acknowledging now that these have been breached.

And that the KBA system which asks you challenged questions, the name of your first pet, your high school, perhaps even the first street on which you lived, these are broken systems and there is a urgency now to replace those systems or augment them with a technology like Mobile Verify.

So, we really do see a level of urgency among enterprises, primarily in our targeted markets that want to rebuild the trust and create a fair and level playing field by use of identity verification and Mobile Verify. So, we do think there is urgency. We do expect this market to continue to grow and the opportunities along with it.

That’s what accounts for our record number of ID customers. And we remained confident in the future of that continuing..

Yeah. I’ll just add on one additional piece there. You’re aware that all year we’ve been investing in our selling and marketing team and getting those people on-board, getting some experience under the belt, we’re seeing that pay-off.

So, we’re seeing some really nice performance come out of the people that we’ve added and the team that we’ve built to support the sales team. So, that’s also contributing to a funnel and a pipeline that we like. And we’re really encouraged to see grow and closing the number of customers is evidence of that, which is terrific..

Great.

Lastly maybe, how do I think about the timeline to getting those live? Is -- I mean, is that still a couple to several quarters? Has anything changed there?.

I wouldn’t say anything has changed, it’s still three months to six months to get them up and running. But the thing to think about what this is, we’re pretty dependent on the customer with this. So, if you think about, we’re a piece of their mobile strategy.

And so, if their mobile strategy is not completely formed or is still developing or they’re still building and aren’t ready to deploy, we’re not going to deploy until that deploys. So, sometimes that just delays when we actually get live.

Of course, we’re always working very closely with the customers to try to push them to get out there sooner than later because then they’re going to get the benefit of the solutions. But again, it’s not always under our control, but it’s still around the three month to six month mark..

Got it. Great. Thank you..

[Operator Instructions] We’ll go next to Ilya Grozovsky with National Securities..

Thanks, guys. Just had a question on the gross margins for the SaaS side of the business. Looks like over the last I don’t know five quarters or so it’s kind of been trending down. Where does it bottom out and kind of where do you see it going forward into next year? Thanks..

Hi, Ilya. Good question. So, yeah, it has trended down as we’ve invested and kind of expanded the hosting environment in our hosting web services. Those costs increase as transactions go up, but that’s not all of the increase. We also have -- we’re working with a large customer who is deploying more in the manual review stage or expert review process.

And so, we're -- that takes a little more labor on our part to staff up and deliver that. And the reason that they’re doing this is they are a company who has been using identity verification services in the past from another company and they are used to doing that through a manual process. So, they’ve started working with us.

They’ve started working with us through our manual processes. And so, we’re supporting them through that until they are ready to actually move their strategy to the automated method of verification. And so, we’ve seen a little bit increase in that as we have increased the personnel to support that.

Longer term, we expect the majority of that to move to auto. And so, then the margins definitely improve with that. But in the near-term, we’ll have a little bit of a margin pressure on it. I don’t think we’re going to see margin lower than where we are today. And beyond a quarter or two, it should be ticking back up..

Okay. Thank you..

And with no further questions in the queue, I would like to turn the call back over to the company for any additional or closing remarks..

Thank you, operator, and thank you everyone for joining us today. We look forward to updating you again next quarter. This concludes today’s call. Have a great day..

And again, this does conclude today’s conference. We thank you for your participation. You may now disconnect..