Welcome to the Mitek Systems' Second Quarter Fiscal 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli of MKR Group. Please go ahead, sir..

Thank you, operator, good afternoon, and welcome to Mitek's second quarter fiscal 2019 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 second quarter fiscal 2019 financial results. That release is available on the company's website at miteksystems.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website.

I'd like to remind everyone that on today's call management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical facts, particularly comments regarding our long-term prospects and market opportunities, should be considered forward-looking statements.

These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially.

We encourage all of our listeners to review our SEC filings, including our 10-K and 10-Q filings for a complete description of these risks.

Our statements on this call are made as of today, May 1, 2019, 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.

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.

With that said, I'll now turn the call over to Mitek's CEO, Max..

Thanks, Todd, and good afternoon everyone. Thanks for joining us today. I'm pleased to report another quarter of strong business performance for Mitek. Before I dive into the quarterly highlights, I'd like to address the company's recent investor related activity.

As many of you know, over the last several months, our board has been engaged in the process of evaluating the relative benefits of various strategic alternatives with a view to maximizing value for shareholders.

Under nondisclosure agreements, the due diligence process was guided by expert advisors to ensure all interested parties were considered and in turn all requested data provided and products, markets and organizations evaluated. This process included both inbound and outbound inquiries. Today, we are announcing that we have concluded this process.

Our board following a thorough review of the results and in consultation with our financial and legal advisors determined that there were no offers that it deemed in the best interest of Mitek shareholders.

We are gratified by the interest in the company and we remain thoroughly committed to delivering shareholder value through operating and growing the business.

We are laser focused on maximizing the significant opportunities we see ahead for Mitek and as such will not be providing additional information nor providing any further commentary regarding this process.

Now, let's talk about our strong second quarter results, which clearly reflect the positive momentum we continued to generate with our two product families. Once again, we delivered solid quarterly results including record revenue for the second quarter of $20 million, which represents growth of 40% year-over-year.

We also achieved our 21st consecutive quarter of non-GAAP profitability. Mitek continues to play an essential role in bridging the physical world to the digital economy and empowering, trusting convenience with our deposits and identity verification products.

Starting with mobile deposit, we remain the clear leader with over 6,400 financial institutions using our product. The number of checks deposited with mobile deposit continues to grow and during the quarter the 3 billion checks was deposited remotely using our technology.

Financial institutions are investing huge resources to drive customers to the digital channels. As they do this mobile check deposits increase. Additionally, we have created new channels and use cases for our technology. For example, large charities including the Breast Cancer Foundation, Susan G.

Coleman will use mobile deposit to engage their fundraisers to collect checks on the spot using their mobile phone. These charities have told us they believe an unknown number of checks written for fundraiser events never actually get to them and they view our technology as a key way to enhance the process of moving money to vital research.

Additionally, we have signed fintechs, who wished to leverage mobile deposit to speed deposits into transactional accounts. We also signed the world leader in accounts receivable automation, who will use mobile deposit to enable their suppliers to scan checks and match remittances.

While mobile deposits continues to rise, the mobile channel captures less than 20% of all retail checks demonstrating there is significant upside for this business. Also in the quarter, we continue to see strong sales of our CheckReader product, which is driven by the banks investing more in sophisticated ATMs.

When I tell people about Mitek and our role in the mobile check deposit service with their financial institutions provide, the first words out of their mouth is often thank you, hopefully, every one of you have used it as well. When you do you understand why customers are so enthusiastic.

We have even heard from people who depend on mobile deposit due to location issues or physical disabilities. We remain proud of how mobile deposit is changing financial services and we're excited about the future. Today, customer relationships are being established without ever physically meeting.

Identity verification is foundational to creating trust between parties in these interactions. Digital businesses are trying to onboard more new good customers online while also preventing fraud and in the financial services industries complying with mandatory Know Your Customer and Anti-Money Laundering regulations.

This is the first leg of the journey from the physical world into the digital economy. This market is large, fast growing and in its early days with one clear leader, Mitek.

During the quarter, Mobile Verify continued to gain traction in this high growth market with our SaaS transactional revenue growing 60% year-over-year and our SaaS transactions growing 66% year-over-year. Mobile Verify is being embraced by partners and customers of all sizes around the world.

One example is Instacart, the web based same day grocery delivery service in cities across the U.S. and Canada. They are using Mitek’s Mobile Verify to speed up shopper onboarding by providing automated forensic checks of digitally presented IDs.

New personal shoppers use our service within Instacart's native shopper app to capture the front and back of their ID and then do a selfie comparison to verify their identity.

Other Mobile Verify success stories include Fair Financial, which is an alternative to traditional car ownership that lets you shop, get approved and pay for your car via a mobile app. And Credit Karma, which during the quarter celebrated the milestone of one million new users onboarded using Mitek’s Mobile Verify technology.

The growth in our customer acquisition underscores the increasing need for identity verification. During the quarter, we added many new mobile verify customers and grow our total number of active ID customer significantly year-over-year.

Some examples of the types of Mobile Verify customers we signed in the quarter are the number one loan originator in the U.S., the number two auto insurer in the U.S., one of the largest investor owned utilities in the U.S., the number one bank in Canada, the second largest bank in Ecuador, the largest credit card provider in the Netherlands and the list goes on.

Not only did we partner with incredible list of new customers, but we expanded our offering and services with many of our existing customers. ABN AMRO Bank expanded our Mobile Verify solution into their credit card division and Fair Financial selected our mobile review service as a step up to their automated solution.

The common use case for identity verification is more good customers fast, a value proposition that Mitek centers around. We also had another strong quarter with partners including international growth with Experian in the UK, Italy and Spain and ongoing momentum in the U.S.

New partnerships that expanded us into new verticals included Sterling Talent Solutions, a global leader in background and identity services. Sterling introduces us into the employment verification market by offering our solution to their customers to help verify the identities of contract workers.

Additionally, we partnered with BioSig-ID, a leading developer of gesture based biometrics for ID verification and access management. Mitek will provide identity verification for its authentication solutions, bio proof ID, ensuring that gesture biometrics are assigned to the correct person during the enrollment process.

In addition to delivering high value to our customers, we also remain committed to innovation both from a product and services perspective. During the quarter, we introduced several new product enhancements including desktop auto capture, which enables our customers to onboard their users from any device.

Today, over one third of users still complete the entire account opening process on their desktop.

With our solution, custom – consumers now have an intuitive and guided interface to help automatically capture a high quality image of their identity documents from the webcam on their desktop and don't have to switch to the mobile phone for the picture. We are the first to market with this solution.

This webcam auto capture for desktop browsers is the latest in a series of solution developments dedicated to delivering a consistent low friction user experience across all channels. Mitek also continues to scale and differentiate through the use of high value manual review in complement to our Mobile Verify solution.

Our ability to provide these unique and distinctive capabilities has proven especially valuable to our customers in Europe where the regulatory requirements sometimes call for human assistance to complete the verification.

In closing, Q2 was another great quarter for Mitek across the board, driven by meaningful top-line growth in both our product families as well as strong bottom line results. I would like to take this opportunity to commend the worldwide Mitek team on their efforts to make all of this happen.

Now, I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we'll open the call for questions. Jeff, please go ahead..

Thanks, Max, and thank you everyone for joining us this afternoon. Let's start with the Q2 revenue and operating results. For the second quarter of fiscal 2019, Mitek generated record revenue for Q2 of $20 million, a 40% increase year-over-year. Software and hardware revenue of $10.6 million was up 21% year-over-year.

The increase in software and hardware revenue was due primarily to the addition of A2iA, the growth of mobile deposit revenue and greater hardware sales. We delivered strong software and hardware gross margins at 91% for the quarter.

Services and other revenue, which includes transactional SaaS revenue, maintenance and consulting services was $9.4 million for the quarter, an increase of 71% over revenue of $5.5 million in Q2 last year.

This increase is primarily due to strong growth in transactional SaaS revenue, which increased 60% year-over-year to $5.3 million and the addition of maintenance revenue from A2iA. Gross margin on services and other revenue was 78% for the quarter up sequentially from 74% last quarter.

Combined gross margin for the quarter was 85% compared to 88% last year. Total GAAP operating expenses including cost of revenue were $21.6 million compared to $15.5 million in Q2 last year.

The year-over-year increase in GAAP operating expense reflects the addition of operating costs associated with our acquisition of A2iA increases in non-GAAP adjustments including stock-comp expense, acquisition related costs and costs associated with our strategic process and our continued investments to grow our identity business.

Sales and marketing expenses for the quarter were $6.8 million compared to $5.3 million a year ago. R&D expenses were $5.3 million compared to $3.5 million last year and our G&A expenses were $4.8 million compared to $3.8 million a year ago. GAAP net loss for the quarter was $700,000 or $0.02 per diluted share.

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, executive transition expenses and costs associated with this strategic process.

Non-GAAP net income was $2.7 million, or $0.07 per diluted share. In Q2, our non-GAAP adjustments include $2.4 million of stock comp expense, $1.8 million of acquisition related costs and expenses and $219,000 in charges related to the strategic process. Our diluted share count was 40.8 million shares compared to 36.7 million shares a year ago.

Turning to the balance sheet, we generated $4.3 million in cash flow from operations during the quarter, bringing our total cash and investments to $24.6 million at the end of the second quarter. Our accounts receivable balance of $11.9 million represents a DSO of 56 days. Now moving to guidance for fiscal 2019.

For our fiscal year ending September 30, 2019, we are updating our previously provided full year total revenue guidance range to $84 million to $86 million, which would represent revenue growth between 32% and 35% year-over-year. We also continue to expect our non-GAAP operating margins in fiscal 2019 to be between 18% to 20%.

For Q3 of fiscal 2019, we expect total revenue of between $21.5 million and $22 million, representing growth of between 34% to 37% year-over-year. We expect total expenses including cost of revenue for Q3 and excluding our non-GAAP adjustments to be 17 – to be between $17 million and $17.5 million.

For the quarter, we expect acquisition related costs and expenses to be between $2 million and $2.5 million and stock comp expense to be approximately $2.5 million. Operator that concludes our prepared remarks, please, open the line for questions..

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

Hey guys, thanks for taking my question and congrats. Nice job there on the numbers..

Thank you..

I guess I just want to touch on the beginning first.

When you think about sort of the trends in ID verification, you've given a lot of use cases and you've had a range of use cases in the past, but I guess if you think about sort of trends outside of financial services, are there specific industries or trends you'd highlight that are more than one or two use cases.

So stuff where you're beginning to see it on a regular basis or because you want a couple of customers and because of referenceability there's sort of more traction within a specific industry use cases. I am just trying to understand sort of what that looks like outside financial services..

Yeah, this is Max, Bhavan. Thanks for the question. I think that we've stated before financial services is our top beachhead market and kind of the next bowling pin for us is the marketplace ecommerce.

And we kind of drill down into that and you think about all these new entrance and basically entire new industries that have been created around Uber and Instacart and Airbnb and swing a cat in any industry. There's somebody trying to create a two sided market in it.

We found that these are places where there typically is not a retail location or some way to have a direct relationship, physical relationship with either the customer or potentially the buyer.

And what's an easy example, Airbnb, right, where you've got both the guests and the hosts and there are different use cases on both sides of that – on both sides of that marketplace. And really different levels of verification required, different levels of trust that need to be established.

So that's a quick example, but I think we've now – we've documented literally dozens, two dozen solid use cases consistently between those two big vertical markets..

Got it, got it.

So now to look at it maybe posing a little differently, if I have to say, if I look at the growth of ID say in three or five years, what do you think that split or what does that mix look like from the cross-sell portion of the financial services and the nonfinancial services portion, how should we think about that? And then I have a couple of quick follow-ups..

Yeah, I think that's a tough question to answer. I think when we kind of look over that kind of time horizon, today we primarily serve, I mean we've got customers around the world. Obviously, we can process passports and something like 198 countries.

But when you start to think other identity documents and being able to do the liveness – biometric liveness type checks, it's the United States and Western Europe primarily.

And you know that just presents a tremendous opportunity and you think about seven plus billion people on the planet, many of them don't have traditional credit backgrounds that would – you would use to try to establish identity.

There's just a lot of places for us to go both with the things we have today, but plus the innovations and the things we're working on in the future, different types of signals. So I don’t know if that's helpful, but just to kind of give you a sense of it.

And similarly in the idea of kind of verticalization, we're bringing focus to our business around financial services marketplace, ecommerce. The technology is applicable across many, many other verticals.

We're making that choice, so that we can be more relevant and deliver higher value to our customers with that expertise and bring focus to our business. But that doesn't mean that over time we can't expand into the use cases that that involve those other verticals..

Yeah, that's fair enough color. That’s helpful. One more for you and then a quick follow-up for Jeff, but on the partner channel, you've talked about deepening those partner relationships in the past.

I just curious to see A) how the efforts progressing and then sort of as you think about the partner ecosystem, just some idea of how does that differ because you've got a pretty healthy partner ecosystem, reseller ecosystem in the obviously Mobile Check Deposit space, but from the ID side, how's it different and how are those efforts going?.

Yeah, I think if you start to pull apart the examples we've used as partners, you know, the long relationship we've had with Experian. In the course of the last couple of quarters, we've announced a relationship with Agilisys in more of the gaming and hospitality and then today talking about Sterling.

In each one of these situations, we’re a layer in a stack, where we're doing the identity verification, both the document verification and then the liveness back to the – the person on the other end of the device. But that's a layer in a stack that's usually delivering something bigger to the customer.

And in the case of Experian that can be full on fraud and onboarding to financial institutions, for Agilisys obviously that has more to do with the verticals and what you're trying to do to bring a new hotel stayer or a new guest into a property in a more frictionless way, so that they can get straight to their room without having to sit in a very long line when they walked through the door of the hotel or the establishment.

And then in Sterling, what goes into a background check and what goes into making sure that you have a legitimate real potential employee and all of the regulatory things that sit around that, there's just more value there. They're more holistic solutions that we ended up as a layer in the stack.

So we see it as a great way to get into some of the other industries that I said that we can apply to with a more wholesome solution and through a channel without doing it directly..

Got you, got you. One last one probably for Jeff here. Just on guidance, obviously really solid results in the quarter, but to take the full year you’re increased slightly. So just trying to think about sort of how should we think that in terms of, you know, is there some seasonality or something? It was specific that happened in the period.

And then I'll throw it out there. I suspect that you won't answer, but any qualitative commentary about fiscal 2020 outlook would be really helpful too. Thanks..

Hi, Bhavan. Thanks for the nice comments. I'm going to answer your last one first. We're not really going to give any guidance on 2020 yet, a little early for us to do that. With respect to updating the guidance for the year, we had good performance in Q1. We had strong performance in Q2.

We're pleased with both of those quarters where we're pleased with the outlook for the year. So I thought it prudent to bring up the bottom end of the range, didn't feel it was something where we’re going to bump up the top end. So that was the change we made. We're feeling good about the business. We're feeling good about Q3 and the rest of 2019..

All right, thanks guys. Congrats. Thanks for taking my questions..

You bet..

Thank you. We'll take our next question from Darren Aftahi of ROTH Capital Partners..

Hey, guys. Thanks for taking my questions and congratulations on the results if I may.

So first, can you talk on the number of new ID customers in the quarter and perhaps what the mix of direct versus indirect was?.

So we didn't provide an exact number this time around. I think it's a useful exercise, but it's not precise enough to really tell you what's happening with the business. The number of new identity customers grew quite substantially compared to Q2 of last year.

And the mix was – it's about 80%, maybe a little bit higher, 85% of those were through our direct activities and then the balance through the partnerships, some of which we just talked about in the last question. Maybe just take that the next step, probably close to 90% of those were driven in the two verticals that we've said were focused on, right.

So the financial services making up kind of the Lion's share of that and then the marketplace new economy..

But – and then I noticed your financial institution number, I think that's been kind of flattish in the 6,100, 6,200 range. It kind of ticked up. I think you said 6,400.

I'm just kind of curious anything unique going on there under the hood?.

I wouldn't say there's anything unique going on there. We don't necessarily update that number quarterly. I think last quarter we – I think we either said 6,100, 6,200. We bumped it up to 64,000. I think is where we're at this quarter. It's just expansion as the long tail of smaller banks and credit unions signup..

And now these charities and other….

Yeah, and then the charities that we mentioned, those are coming online as well..

Got it. Just two more if I may. First one, any update on your Agilisys partnership where implementation kind of lies there. And then, Jeff, I didn't catch the – what the actual strategic kind of costs in the quarter was and kind of you're nonrecurring market share there? That'd be great. Thank you..

I'll take on the Agilisys one while you dig that up. So, yeah, in the quarter we actually participated Agilisys held their annual user conference. I believe it was in Las Vegas and we had a squad from Mitek out there, participating with them.

The word that came back from the team that we had on the ground was they were really well embraced, not just by Agilisys, but by the customers and excited about where this goes over time.

I think kind of balance that with the learning that we picked up, which is having the technology on the phone and being able for Agilisys – Agilisys to provision this within resorts and casinos and hotels is – there's a lot of interest. It's also balanced with the idea that it's not just the investment in this technology.

What we've learned is that the hotels have to have the Bluetooth ready locks on the doors. And so, there's a little bit more to it than just buying the software or licensing the software and provisioning things as a payload on us, an SDK on a mobile app.

These institutions have to – they got to be ready for it in the actual hotels themselves, but very excited about the relationship and where it can go. And Jeff, I missed the second question….

Yeah, the second one, you’re asking about the strategic process costs. It was $219,000. Darren, at the end of our press release, there is a table that will have all of that in case you can't read your handwriting..

Fantastic. Thanks, guys..

Yeah..

Thank you. We'll take our next question from Mike Grondahl of Northland Capital Markets..

Hi, this is Mike Pochucha on for Mike Grondahl. Thanks for taking our questions and congrats on the quarter. Maybe first off just we're about a year out from the A2iA acquisition maybe high level thoughts on the progress there and sort of the opportunity going forward with both that acquisition and kind of international in general..

Yeah. So, I see those two things as combined at some level. Yes, so we're coming up on one year. I think the team, the product, the kind of the branding and systems are pretty far along from an integration perspective.

Looking back, the idea that we now have that technology, those customers, it really puts us in a very strong position in our deposits business, checks business overall just as a really dominant player there. There's not a lot of alternatives. We think that the business has grown. We believe that it's now organically kind of part of what we do.

Over half of their customers, over half of their business was based here in the United States. So while it helps us internationally, it was mostly selective countries throughout Europe. So I don't know that it's a huge wind in our sales internationally. I think we're getting that from just the footprint we have throughout Europe to begin with.

Jeff, I don't know if there's anything else you'd add from a financial perspective?.

No, I think we're pleased so far with the A2iA acquisition. It's contributed nicely, both the revenue and bottom line. We don't necessarily break that out, but we're pleased with it. And like Max said, the integration activities have gone quite well.

We still have some work to do, which I think we’ll probably be through that work by the end of this fiscal year, but generally it's gone well..

Okay, great.

And then just on the BioSig partnership announcement, can you talk a little bit about the market opportunity there kind of combining of ID verification in the biometric side?.

Yeah, so I think this is a – we're proud of the partnership we have. It's a great example because there are many, many organizations out there, software and technology providers that are trying to crack the code on authentication and then re-authentication.

And anybody who has got a computer, it’s kind of been through and works for a corporation has been through this process of I forgot my password or I got myself locked out. But this all starts kind of the premise of all of it is, who you're dealing with. You actually know who that person is.

And if you're on the road, if you're not in the office, if your organization can't validate you with a face to face contact and the device that you're going to use to access is already – you can't get it, you can't get into it, the ability to identify yourself using more traditional means of government issued identity documents combined with the selfie, which basically turns into a biometric and matching those two things together.

It just takes you all the way back to the beginning of the process and we've been approached not by this partner but others in this field because it's kind of one of the missing links. And so, we'll see what comes of it. It's a relatively new relationship, but we can see where the applicability is pretty broad..

Thanks. I will get back in the queue..

Thank you. We'll take our next question from Mark Schappel of Benchmark..

Hi, thank you for taking my question and a nice job on the quarter. Most of my questions have been answered here, just one or two. Max with respect to sales execution at the company, it's clearly improving. That's good.

And I just wondered if you could just talk about some of the initiatives that you've put in place or – and some of the initiatives that have been undertaken since you arrived to boost sales execution..

Yeah, thanks for the question Mark. I do think things are improving. I think things can even get better. We've got a solid team here. It's a relatively small, but powerful team, is the way I would think about it.

And the way these teams get better, the way you increase productivity, the way you generate higher revenues with not having to add a ton more people is bringing focus and repeatability to it. And so, you know, even in today's call talking about what are the market segments that we're focused on.

And that was mainly around industry segments and you start asking about use cases, you start asking about what geographies do you want to ring fence, size of company, right.

What's the size, what's the minimum threshold that you're prepared to actually do business with somebody and where's that threshold for doing it face to face in an enterprise manner and where's that threshold when you're going to do it using zoom and the Internet and more of an electronic remote approach.

So I think we've made some good progress in that area, but I think looking forward and thinking about going into our 2020 fiscal year in October, we'll make some further modifications, adjustments and refinements and we'll just keep getting better and becoming more productive.

And that's – ultimately that's how these companies really turned into big winners from a bottom line perspective, right. You get the scale and repeatability and just a lot of it falls to the bottom line..

Great, thanks. And then one final question. On the ID side of the business, what competitive dynamics are you seeing out there? There has been some – some of your private competitors I know have been picked up recently in the last couple of months, M&A wise.

I was wondering if you're seeing any change in dynamics out there competitively as a result of that..

Yeah, I wouldn't say we’re seeing anything radically different, but I think it does kind of come to a narrative that's kind of a well worn path for enterprise technology, enterprise software in the early stages of market, which is where we are.

There's a lot of entrance in the market, whether those are venture backed, small privately-owned firms that were mom and pop, come to it from an adjacent space. And you can name all these categories. You've watched it unfold as they mature, as they kind of go through the life cycle as they grow. 56 companies get funded in the beginning.

And you look back two, three, four years later, there's three or four. There's a handful of leaders. And we're really confident, we feel very good that we can be one of those leaders when we look back three, four years from now. So, the competitive dynamic is it'll be a consolidating space..

Great, thank you. That's all for me..

Thank you. [Operator Instructions] We'll take our next question from Ilya Grozovsky of National Securities..

Thanks guys. A lot of my questions have been asked, but I had a question about pricing power on the Mobile Check Deposit business. I don't think you guys have kind of use the pricing power in a while or raised any prices and kind of just want to get your thoughts going forward on that. Thanks..

Yes, so thank you for the call. Thank you for the question. I think we definitely believe there's pricing power there just based on our stature in the market.

The places where we've been able to start to leverage that, at least in the time that I've been with the businesses, some of the things we've talked about getting new applications for the technology.

So the idea of going into a charities directly, circling back to question earlier that that came from one of your colleagues here around A2iA, going back and circling back with the A2iA customers and implementing more of a traditional commercial relationship that you would have with a business of our stature.

Those are places where we've been able to do it in kind of the heart of kind of the place that we've existed with the deposits business. We do it. It's just a little bit more challenging because of the size of the partners that we're dealing with there..

Okay, thank you..

Thank you. This concludes our questions for today. And I'll turn it back to management for 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 wonderful day..

Thank you, ladies and gentlemen. You may now disconnect..