Q4 2019 Earnings Call

The conference over to talk currently KLR Group. Please go ahead Sir.

Thank you operator, good afternoon, and welcome to my tax fourth quarter and full year fiscal 2019 earnings conference call with me on todays call or Miteks, CEO , Max Cornacchia, and CFO , Jeff Davis.

Before I turn the color dymaxion job I'd like to cover a few quick items. This afternoon I check issued a press release announcing the sports colder and full year fiscal 2019 financial results.

That releases are available on the company's website at Mitek systems Dot 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 todays call time as well 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 a market opportunities should be considered forward looking statements. These forward looking statements may include car.

That's 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 could differ materially we encourage all of our listeners to review our S. You see filings, including our most recent 10-K and 10- Q4 complete description of these risks.

Our statements on this call are made as of today November seven 2019, and the company undertakes no obligation to revise or publicly update any of the forward looking statements contained herein, whether as a result of new information future events changes and expectations or otherwise.

Additionally throughout this call will be discussing certain non-GAAP financial measures today's earnings release unrelated to the current report on form 8-K, you described the differences between our non-GAAP GAAP reporting and present a reconciliation between the two for the period as reported in the release.

With that said I'll now turn the call over to my checks CEO .

Thanks, Todd and good afternoon, everyone. Thanks for joining us today. It gives me great pleasure to report that our fiscal year 2019 was another outstanding year for Mitek. It was also our second consecutive fiscal year with revenue record revenues for each quarter.

Our solid revenue growth and increased profitability continues to be driven by both our deposits and identity product families for fiscal 2019, we generated record revenue of $84.6 million representing growth of 33% year over year. We also generated non-GAAP net income of 17.3.

Million dollars or 42 cents per diluted share up 57% year over year and cash flows from operations, a $14.3 million, reflecting on 2019, we remain excited by the momentum in the identity verification market, which is very large early stage and rapidly open.

Thing up to new use cases that service the digital World. We also experienced continued growth from our highly profitable deposits product line as it continues to further penetrate the market.

Relative to the identity business I think we can all agreed that the digital identity verification market is exciting fast growing and mission critical identity verification is an essential step to establishing trust in a digital world where customer relationships are being created without ever physically meeting to reference Gartners recent market study.

Quote nearly every component of modern life embraces digital channels and the needs corroborate the identity of customers users citizens partners and employees through remote interactions continues to grow on quote [laughter]. So while the market for identity verification is still in its early days it represents a significant.

Opportunity for Mitek.

In fiscal 2019, our identity verification solutions gained significant traction with our transactional SaaS revenue growing 63% and our SaaS transactions growing 74% year over year.

Mobile verify our industry, leading product continues to be adopted by partners and customers of all sizes around the world our customers globally represent hundreds of the world's best known brands some of our new identity verification customers. This year include Assureon TD Ameritrade Docusign Adobe avian amro.

Comericas access bank open door and the list goes on.

Our accelerated customer acquisition underscores the significant need for identity verification and it's essential use case, which is to enable businesses to onboard more good customers faster a value proposition that my checks centers around.

One of our newest customers is borrow money a mobile only FDIC insured no fees banking app that is highly rated for outstanding customer service borrow money use is our mobile verify solution to secure the digital onboarding process with particular focus on ensuring that new account opening is easy.

Lenient and safe for their customers.

No promises their customers happy human and helpful customer service and its customer experience starts with the very first interaction. We are proud to deliver an identity products for MRO that meets their high standards of customer excellence.

Borrow is also an example of how our partnership with banks can span multiple use cases as viral has been using our mobile deposit products for several years [laughter]. This year. We also saw the benefit of a strengthened leadership team in the identity organization with new executives appointed in engineering people operations and product.

Management.

This elevated talent will be vital part of our growth plans going forward.

As we begin fiscal 2020, it is without a doubt thrilling time to be part of the Mitek team building on our progress in fiscal year 2019, we will continue to deliver greater focus in our operations and investment in research and product development.

We know the profile of our best perspective customers and partners and we will continue to prioritize our expertise within the financial services and marketplace segments. We will also continued to deliver high touch customer engagement and best in class professional services.

Evasion lso accelerate in fiscal year 2020, with our ongoing investments to deliver the world's leading most accurate and most stable identity verification solution.

Hi Tech is the only enterprise class provider in the identity category.

Our standards of service remain unchallenged, our product delivers against all measures of performance acceptance availability speed assurance and as such our proven track record has only strengthened.

Switching to our deposit solutions business, we remain the clear market leader with over 6500 financial institutions, using our mobile deposit product retail banks are investing significant resources to drive customers to this digital channel and they do as they do this mobile check deposit continues to increase we are.

Proud of how mobile deposit has changed financial services and become woven into the fabric of the mobile banking.

And we're excited about the significant opportunities ahead, as we work to expand adoption into new verticals and add capabilities for existing customers mobile check deposit continues to be adopted by large impactful charities to help them ease and accelerate revenue collection Alzheimer's Association reports that their mobile App revenue grew fit.

87% after adding mobile check deposit.

Turning our attention to USAA is continued attacks on the financial industry.

As we've noted previously and included in our filings beginning in 2018 USAA has challenged many financial institutions with allegations that components of such institutions remote check deposit solutions infringe upon certain of USA A's patents.

In 2018, USAA filed two lawsuits against Wells Fargo alleging these claims mitek strongly believes that we have invented all of our core technology and that our products do not infringe on any USAA patents as such even though USAA has not sued mitek directly for infringement of any you.

I say patents on November Onest Mitek filed a complaint seeking a declue Tory judgment that is that it's automatic check image capture product does not infringe on certain patten's owned by USA.

[noise] subsequently this week one of the Wells Fargo lawsuits was concluded in the Eastern district of Texas in favor of USAA with damages against Wells Fargo and the amount of $200 million. We believe this is an incorrect verdict. This verdict is subject to post trial motions and appeal by Wells Fargo we into.

Tend to prove through the DJ action that my checks technology does not infringe on USA is patents, we view the DJ action as an important step to provide certainty to our customers concerning the use of our automatic check image capture technology.

As this is a very complex area of intellectual property law and subject to ongoing litigation. We're limited in what information, we can share publicly and therefore will be limiting our comments on this situation.

Lastly, we also announced today the appointment of Donna Wells to our board of directors Donna built a career in Silicon Valley at some of the most forward thinking companies in the region and has played an important role on our advisory board for several years her experience in financial services, Fintech and cloud software will be.

A tremendous asset in helping guide mitek into the next phase of growth.

Excited to welcome her to our board of directors.

In closing, we're pleased with our fourth quarter in fiscal 2019 full year results, which included record revenue and profit. It has been an active exciting and transformational fiscal year and the mitek workforce should take pride in how we deliver differentiated value to our customers. We have the teams the vision the technology in a market need of the solution that.

Hi Tech is uniquely positioned to deliver together this amounts to a significant opportunity for all miteks employees and shareholders now I'll turn the call over to Jeff to discuss the financial results in more detail. Following Jeff's remarks, we will open the call up for questions. Jeff. Please go ahead.

Thanks, Max and thank you everyone for joining us this afternoon.

Let's start with the Q4 revenue and operating results for the fourth quarter fiscal 2019, Mitek generated record revenue of 25 million, a 19% increase year over year.

Software and hardware revenue of 14.4 million was inline with prior year results within the software and hardware like we saw continued growth in deposits revenue offset by declining software revenue from our legacy on premise I'd products.

We delivered strong software and hardware gross margins of 92% for the quarter.

[noise] services and other revenue, which includes transactional SaaS revenue maintenance and consulting services was 10.6 million for the quarter, an increase of 57% over revenue of 6.8 million in Q4 last year.

This increase is due to strong growth in transactional SaaS revenue, which increased 58% year over year to 6.3 million and growth in maintenance revenue for deposits products.

Gross margin on services and other revenue was 80% for the quarter up from 73% in Q4 last year.

Combined gross margin for the quarter was 87%, which is in line with last year.

Total GAAP operating expenses, including cost of revenue were 20.5 million compared to 22.4 million in Q4 last year.

This decrease in total expenses is primarily due to a onetime benefit of $1 million related to an insurance settlement received in the quarter.

Executive transition costs recognized in 2018, which did not recur this year.

Lower acquisition related costs, and lower stock based compensation and 29 team.

These decreases were partially offset by increased cost related to investments in operations to grow our business.

Sales and marketing expenses for the quarter were 6.5 million compared to 5.8 billion a year ago.

R&D expenses were 4.6 million compared to 4.7 million last year.

And our Gionee expenses were 4.1 million compared to 6.5 million a year ago.

The decrease in DNA expenses is primarily due to the previously mentioned items.

GAAP net income for the quarter was 3.3 million or eight cents per diluted share.

Our diluted share count was 41.6 million shares compared to 39.7 million 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 provides a useful measure for the company's operating results by excluding acquisition related cost and expenses stock comp expense litigation expenses and other onetime items.

non-GAAP net income for Q4 was 8.7 million or 21 cents per diluted share in Q4, our non-GAAP adjustments included 2.3 million of stock comp expense 2.2 million of acquisition related cost and expenses.

500000 of litigation expenses, and a 1 million dollar benefit related to an insurance settlement received.

Now looking at results for the fiscal 2019 full year.

Revenue totaled 84.6 million, an increase of 33% year over year.

Software and hardware revenue of 46.8 million was up 15% over the prior year due primarily to the growth in mobile deposit and the addition of a two I a offset by the declining software revenue from our legacy on premise I'd products.

We maintained strong software and hardware gross margins of 92% for the year.

[noise] services and other revenue was 37.7 million for fiscal 2019, an increase of 65% over the prior years revenue of 22.9 million.

This increase is due primarily to the addition of H. why a maintenance revenue and the growth in transactional SaaS revenues, which increased to 63% to 21.4 million.

SaaS transactional volumes increased 71st 4% year over year [laughter].

Services and other gross margin was 77% for the year up from 75% last year.

In terms of product contributions to total revenue for the full year, our identity products contributed approximately 33% of our total revenue representing a very strong year over year growth rate of 25% and highlighting our momentum in the market.

Keep in mind, the strong growth of our transactional SaaS revenue of 63% was partially offset by the decline in our legacy on premise identity software revenue as we wind down those on premise product lines.

Our deposit products, which include mobile deposit today too I a comprised approximately 67% of our total revenue and grew 37% in the year driven primarily by the addition of age Hawaii and growth in our mobile deposit revenue.

As Mitek has acquired three European companies over the last four years, our exposure to foreign currency fluctuations as increased this exposure is primarily related to the strength of the U.S. dollar against the euro.

In fiscal 2019, the euro declined in value by approximately 6%.

Since we have approximately 25% of our revenue denominated in euros. This had a negative impact on our reported revenue of approximately 1.1 million when compared to 28 team.

Naturally we have expenses denominated in euros as well so the natural hedge helps to minimize the impact on our operating earnings [noise].

[noise] total GAAP operating cost and expenses for 2019 were 89.2 million an increase of 25% compared to total operating expenses.

71.4 million in 2018.

This increase is due to the costs associated with the addition of a two okay.

Restructuring costs related to two I and the additional investments we made throughout the year to fuel our growth in the identity business.

GAAP net loss for 2019 was $724000 or a loss of two cents per share compared to GAAP net loss of 11.8 million or a loss of 33 per cents per share for fiscal 2018.

non-GAAP net income increased 57% for the year to 17.3 million were 42 cents per diluted share compared to non-GAAP net income of 11 million or 29 cents per diluted share for fiscal 2018.

GAAP bps basic and fully diluted share count was 39.3 million for 29 team.

Our non-GAAP EPS fully diluted share count was 41.3 million for fiscal 2019.

Stock comp expense was 9.6 million for fiscal 2019 compared to 9 million for fiscal 2018.

As of September Thirtyth 2019, our head count was 284 compared to 300, Nate a year ago.

Turning to the balance sheet.

We generated 14.3 million in cash flow from operations during the year, bringing our total cash and investments to 34.8 million at September Thirtyth 2019.

Accounts receivable balance of 14.9 million represents a DSO of 54 days.

Now moving to guidance for fiscal 2020.

For our fiscal year ending September Thirtyth 2020, we expect full year total revenue to be between 98 to 102 million.

Which would represent revenue growth of approximately 16% to 21% year over year.

We expect our non-GAAP operating margin in fiscal 2020 to be between 2022 %.

For Q1 of fiscal 2020, we expect total revenue of between 21, and 22 million representing growth of between 19% to 24% year over year.

We expect total expenses, including cost of revenue for Q1, and excluding or non-GAAP adjustments to be between 17.5 at 18 million.

We expect acquisition related costs and expenses for Q1 to be approximately 1.6 million and stock comp expense to be approximately 2.5 million.

Operator that concludes our prepared remarks. Please open the lines for questions. Thank you, ladies and gentlemen at this time, we will open the floor two questions. If you would like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure that your mute function is turned off to allow your stake to reach our equipment.

And again that a star one to ask a question well pause for just a moment hello, everyone and opportunity to signal for questions.

And our first question comes from the von <unk> with William Blair.

Hey, guys. Thanks for taking my question.

I guess, Max maybe we'll start off and I know, you're not going to comment too much although the legal stuff, but but obviously you know there was a USA.

Hi Tech issue, a few years ago and that got resolved I think it was mutually whatever the I forgot the exact terms and so now you've obviously got USA going after 200 financial institutions. I guess I was wondering is there are like is there a question of liability to you guys.

He's obviously, the mobile check deposit side, they're using.

Youre technology, and so I'm trying understand what the risk of that liability coming back to you is or if it's not it fits with the financial decisions. Given you guys had already resolve issues with USAA through years, though just trying to understand what that what that could look like.

Potentially.

Yes, the matter that was resolved between USA and Mitek. It goes back six or seven years ago and was a intellectual property and patent issue, but it was not related to what's ONTAP here today.

What we mentioned in this earnings call. What was released in the 8-K today is really us taking the offensive action last week with the DJ.

Looking for the judgment from the court so that we can.

Basically prove that Miteks misnap auto check image capture technology does not infringe on the USAA patents and.

That's our obligation and our strong feelings to vigorously protect our innovation, our IP and the rights of our end users.

Probably doesn't make a lot of sense to talk beyond that I can share with you know the folks from Wells Fargo came out today with comments about yesterday's action and I'll just quote here from the note that they sent out we believe this is an industry issue involving numerous other banks. So I think this is again kind of.

The battle of Giants.

Okay, Okay, but I just to be clear then I'll sort of question follow up a job, let's be clear the patent issue that they are going after wells Fargo for that.

Around my staff is different than the issue. We had that was covered to stop that whatever let's see I go back and look.

But that is totally different than to the patent concerns. They had whatever was six seven years ago.

Yeah, let me touch each other and be related in some way, but it is different enough that obviously have ended up in court [noise].

Got it God.

And then Jeff I, just mentioned guidance, obviously your gross on the SaaS side.

Yes in fact was really solid this year.

Obviously mobile check deposit business helped with acquisitions I look at the guys next year and it feels like given the size of the business on the growth rate.

You know if I take out the inorganic part of the thought some acceleration I know you're shutting some businesses that maybe if you could do the puts and takes all what's being shut swaps.

Onyx pieces, just to help us understand sort of what the apples to apples growth rate looks like for the core business is on the mobile side and the check deposit side. So we can sort of have understanding what that means for next year, well, obviously FX had an impact you're supposed to just help us understand puts and takes the next year's guidance. Thank you.

Sure, let me see how I can piece that together to help you out so guidances, 16% to 21% growth for next year. You know, we we shared with you last quarter on our call that so were end of life in some of the identity platforms and that that was going to impact some of the revenue.

And those are legacy systems, you know going back several years and accumulated from a multiple acquisitions.

We also discontinued the product line with our French subsidiary for document reader. So those are both impacting that and so we turn our focus to our SAS transactions line, which for 2019 grew 63%. It's been a terrific number in some quarters I'm sure you know in excess of seven.

The percent and as that number gets bigger you're not going to see the 70% continue but you're going to see real steady growth rate. So we look for that line to continue to grow very healthy you know in excess of at least 40% if not probably 50.

We'll see really nice growth in that line as we continue through this and as we get beyond you know shedding the revenue on these other product lines that'll just become more clear in a bigger piece the picture when we look to the deposits business.

That's been a really nice growing business for US you know between 10 15, 20% a you know end last in 2018 above that I believe.

We added a two way, which was a grower, but at a much lower rate and you know as we've discussed we do expect that deposits overtime will slow and the growth rate will be drifting down towards 10%, but as we look into next year, we expect that deposits will still be above 10% I'm, probably not significantly but.

Hopefully above 10% and then just to recap on the earlier the the her go through it will be on the identity and the transactions like so hopefully that helps you get a little.

A little sharp.

Yeah, Great no. That's super helpful. Thank you guys appreciate the color. Thanks again.

Got it.

And once again, if he would like to ask a question that star one well take our next question from Mike.

Grondahl with North capital Northland capital markets.

Yeah, Hi, Thanks, Michael on for Mike.

First just on the.

Uh Huh platform rationalization.

Are you doing business, it seems like where their own revenue, but as far as like pass on the platform going from seven to one like how that progress going there.

Yeah, Mike maybe just to tease us apart so there were.

Two on the deposits checks side of things that you mentioned day to I a are basically a series of legacy products from a two way that we no longer sell so that's part of the revenue.

Dis synergies and then what we announced back in June around rationalizing harmonizing the team and making.

So pretty painful people cuts, particularly in our in our French subsidiary those expense changes. We're all disclosed back then I am looking it Jeff years, we're talking about this I think the overall and the majority of that's already flow.

You know yeah, the restructuring charges flowing through and we're seeing the benefit some of the benefit we saw in Q4, and we'll continue to see yeah on the other side of the business with identity as Jeff was [laughter] inching in his prepared remarks, we did these acquisitions in Europe , we had some legacy on Prem systems that were organic.

Hi, My Tech and so between some of the things we inherited through those acquisitions and some of the legacy really on Prem related things, that's what we talked about back in July .

As far as things that we were going to accelerate the end of life. The we don't sell those things, but end of life and.

You know the transitioning of those customers were available but in some situations. There was no successor product because it was not strategic to our go forward plans. So I.

I think all that was disclosed back then and we're seeing that run through the run through the income statement again in the form of revenue Dissynergies, Yeah, I think the on the seven were.

At least two I think there's got to done as of end of year on a percent Yep and a you know we'll see we'll see a couple more by the end of the year and then as we shared last quarter the Spanish.

The Spanish platforms, probably or two to three years out before were done before we transition those over.

Got it that's helpful. Then maybe on a borrow money you mentioned that.

It's sort of an expanded use case, starting with deposit, but then moving in to verify.

Got that right.

<unk> current client bases is a lot more of that opportunity going forward you think.

Yeah, I think we've gotten a number of examples you know what do you want to call amnio banks or digital only banks are challenger banks are fintechs.

You know the Blue lines Exos borrow this BCN 10, we've got these examples both in Europe , and domestically, where you know they need the identity verification because there is no branch to go in and present. Your your documents to open an account whether that's for credit card you know debit checking whatever.

As they are banks. They also then need to be able to process that legacy payment method called a physical paper check.

And so sometimes we end up starting with the identity.

Identity verification and then they adopt the check technology other times. The check is in their first just because it's you know they need to accept the money [laughter].

So yeah, I think we've got a pretty consistent set of examples where that works you know they aren't necessarily tied together technologically, but they're tied together through the idea that this is a new bank and they need to be able to do both these functions and we help them with both.

Got it thanks bought back in the Q.

Thanks, Mike.

Ladies and gentlemen. This concludes today's question answer session now and now I'll turn it back to talk really 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 todays call have a wonderful day.

Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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