Q2 2020 Earnings Call
Earnings Conference call with me on todays call or Miteks, CEO, Mexico, Nokia and CFO, Jeff Davis.
Before I turn the call over to Maxim, Jeff I'd like to cover a few quick items. This afternoon Mitek issued a press release announcing its second quarter fiscal 2020 financial results that releases available on the company's website at Mitek systems Dot com.
This call is being broadcast live over the Internet for all interested parties in the webcast will be archived on the Investor Relations page of the company's website.
I want to remind everyone that on todays 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.
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.
Encourage all of our listeners to review, our SEC filings, including our most recent 10-K and 10-Q for complete description of these risks.
Our statements on the call today are made as of April Thirtyth 2020, and the company undertakes no obligation to revise or update publicly I made a 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 and the related current report on form 8-K describes the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in other words, but that said I'll now turn the call over to my Texas.
CEO Matt.
Thanks, Todd Good afternoon, everyone. Thanks for joining us today jumping right in and the Cobiz 19 pandemic continues to unfold. Our foremost commitment is to ensure the health and wellbeing of our employees their families and our worldwide community.
As such we have taken all necessary measures to maintain a continuity of our operations and to safely operate at full strength, while complying with government mandated stay at home directives.
As a modern digital business, we were able to pivot to work from home within one day and all of our team members continue to be highly effective in this environment delivering on all committed service levels.
As such Mitek is steadfast in our commitment to empower trusting convenience in a digital world. Our identity experts are working 24 by seven around the globe to ensure that more businesses are enabled to transact digitally and secure their platforms through easy fast and secure.
Entity verification.
We have increased human capacity to ensure more agents are available in more locations to support the increasing volumes for high assurance identity verification.
We are also partnering with financial institutions as well as the federal reserve here in the us to expand usage of mobile check deposit amongst consumers summing up our cloud first technology provides a secure environment for both existing and new customers and now more than ever our.
Enterprise class expertise products and services are being leveraged.
This was reflected in our second quarter results, where we delivered record revenue of $23.2 million representing growth of 16% year over year.
We also generated non-GAAP net income of $5.4 million or 13 cents per diluted share up 98% year over year and cash flow from operations was $3.2 million.
During the quarter, we continued to see ongoing positive momentum in the identity verification market.
We expanded with our existing customers, particularly in the gig economy segment and our identity verification solution continues to gain traction with our transactional SaaS revenue growing 38% year over year.
We also continued to experience growth from our highly profitable deposits product line with adoption and utilization continuing to increase.
While the current environment, certainly challenging and uncertain.
The way, we live and work is forever changed the need for fast secure remote services is magnified and regardless of where our customers were in your digital transformation journey. The time is now to accelerate.
Providing secure digital identity verification isn't just a question of convenience during covert 19, it's become a necessity for organizations makings urgent shift to digital.
Identity verification is the essential digital use case, enabling businesses to onboard more good customers faster in this vital environment.
As such several of our customers escalated their transaction volumes during the quarter specifically in the gig economy sector. We saw significant spikes from our home delivery customers almost overnight. They went from being a convenience to serving as a lifeline for millions of people following stay at home orders to slow.
So the spread of Cobot 19.
Now more in demand than ever Mitek is helping these customers bring new shoppers safely onboard to meet the increase in demand.
One of our customers in Europe, who is a leading provider of digital identities also experienced exponential growth in traffic volumes due to their service being the gateway access government services, such as Cobot 19 benefits.
Increased demand for online banking as well as insurance in lending also contributed to transactional growth in the quarter.
At the same time, we saw a slowdown in travel and hospitality sectors with slower than normal transaction volumes as a result of the pandemic.
As we look forward from a revenue perspective, we are currently receiving a benefit in our identity business from some of our existing customers who are experiencing significantly more traffic as a result of the current environment.
But at this point it is impossible to predict what impact Kovac 19 will have on our current customers and our pipeline of potential new customers. These are serious times and there are large swaths of the economy that are being affected and our customers are not excluded.
Near term it may be a bumpy road as we whether the economy, but internally we are continuing to focus on execution, we're not pulling back on our investments to grow our business as we believe identity verification is more important now than ever to companies looking to digitize their businesses.
However, we are proceeding cautiously to preserve our business our bottom line and our resources.
Turning to our deposit solutions, if there ever was a time when mobile check deposit was essential it is now.
As the economic impact payment checks begin to circulate consumers, we use mobile check deposit many for the very first time.
This use case may even be a camp catalyst for digital or mobile banking adoption.
Banks are investing significant resources to enable their customers through mobile and digital channels and as they do this mobile check deposit continues to increase we remain the clear leader in this regard with over 7000 financial organizations using our products.
We are proud of our mobile deposit offering and its ability to insist people in this time of needs.
Those cases returns verdict in favor of USAA. The court is still considering post trial motions in those cases that could overturn the verdict or result, new trials in the event Wells Fargo is unsuccessful in overturning the verdicts or obtaining new trials. The two cases will be subject to appeal to the U.S. Court of appeals for the Federal Circuit. In addition.
U.S. patent office is currently reviewing the validity of several of the patents that issue in the Wells Fargo cases final resolution of those issues, maybe over a year away.
Also as I noted last quarter My Tech filed an action in California, seeking declaratory relief at my text products do not infringe the patented issue in the Wells Fargo and the first wells Fargo's lawsuit.
In January USAA files emotion to dismiss for transfer our action to the Eastern district of Texas, and we oppose that motion.
Suddenly the California Court ruled that this action should be heard in eastern district of Texas as such we intend to vigorously prosecute arcade in this new venue as my Tech invented all of its core technology and we believe our products do not infringe on any USAA hands.
Today, we are we also filed a petition with the U.S. patent office challenging the validity of the only patent that issue in the first wells Fargo lawsuit that is not already subject to challenge filed by Wells Fargo.
We expect a preliminary decision on whether this challenge will be instituted in about six months.
In closing we are pleased with our results which include record revenue and significantly improve profitability.
I'm proud to lead the my Tech workforce, who have rallied without question to deliver the technology products and services that our customers need and value. During these extraordinary times. This is a seminal moment that my tech has been created to enable we have to teens division technology and a market need other solution at my Tech is uniquely position.
To deliver.
<unk> this amounts to a significant opportunity for our employees and shareholders.
[noise] now altering the call over to Jeff to discuss the financial results in more detail. Following jeffs remarks will open the call up to questions. Jeff. Please go ahead.
Thanks, Max and thank you everyone for joining us this afternoon.
Let's start with the two two revenue and operated results.
Or the second quarter of fiscal 2029 took generated record two two revenue of 23.2 million, 16% increase your all year.
Software and hardware revenue was 11.5 million and increase of 8% year over year.
Services, another revenue, which includes transacts, so fast revenue maintenance and consulting services was 11.7 million to the quarter and increase of 25% or two to last year.
This increase is due to grow up in transactional service revenue, which increase 38% year over year, the 7.4 million.
Two two deposits revenue increase 13% to 14.6 million.
Revenue for identity verification increased 21% to 8.6 million.
We delivered strong software and hardware gross margins of 92% for the corridor.
Gross margin on services. Another revenue was 80% of the quarter up from 78% and Q. to last year.
Total gross margin for the quarter with 86% up from 85% last year.
<unk> operating expenses, including costume revenue for 22.1 million compared to 21.6 million and Q. to last year.
This increase is primarily due to investments in operations to grow our business and increase litigation costs.
These increases were partially offset my lower expenses in our parents operations as a result of the restructuring announced in July 29th.
And the decline in acquisition related costs and expenses.
Sales and marketing expenses for the quarter were 7.4 million compared to 6.8 million a year ago.
The expenses for 4.8 million compared to 5.3 million last year.
And our T.N.N. expenses were 5.2 million compared to 4.8 million a year.
Yep mid income for the quarter with 900000 or two cents per diluted sure.
Or did looted share kind of it was 42 million shares compared to 38.9 million shares a year ago.
As a reminder, our earnings release includes a reconciliation between gap and non-GAAP net income.
We believe Nongaap net income provides you use a measure of the companies operating results by excluding acquisition related costs and expenses.
Dotcom expense litigation expensive and they're related tax in packs of these items.
<unk> net income for Q. to increase to 5.4 million for 13 cents per diluted sure compared to 2.7 million or seven cents a year ago.
Or non gap adjustments included 2.3 million to start comp extends 1.6 million of acquisition related costs and expenses.
561000 of litigation, which comes for the corridor.
Turning for the balance sheet.
Regenerated 3.2 million and cash flow from operations during the quarter, bringing our total cashing investments to 42.5 million at March 31st [noise].
[noise] or accounts receivable balance of 13.7 million represents a D.S. or 52 days.
That's part of the share buyback program, we announced in December we repurchased approximately 137000 shares during the quarter at an average purchase price is $7.33 per share.
This leads roughly 9 million remaining of the 10 million buyback program, which runs through December 2020.
Given the current global pandemic, our borders opted to put the repurchase activity on hold for the time being.
Now moving the guidance for the remainder of fiscal 2020.
My Tech is withdrawing its previously provided guidance for this fiscal year ending September 30th 2020, due to the uncertainty of the full impact of the covert 19 pandemic on the economy, our customers and our business.
In closing we are pleased with our results for the second quarter, which include record revenue and significantly improved profitability.
And we look forward to continuing to deliver the essential services that might check provide.
Operator that concludes our remarks will open the line for questions.
Thank you if you would like to ask a question play signal by pressing star one.
Your telephone keypad, if you're using a speaker phone. Please make sure you mute function is turned off to allow your signature retry equipment again pressed one.
The question well posture, just a moment to allow everyone an opportunity to signal for questions.
And our first question.
It's from Mike Randolph <unk> Securities. Please go ahead.
Oh, yeah, Thanks, guys and congratulations on the corridor can you talk a little bit about the new customer funnel for mobile I.D. and kind of what you see there in this environment.
They might get smacked, yeah. Thanks for the.
Positive comments, Yeah, I think we you know we've been building that pipeline you know for the six quarters that then with a business we've been retooling and number of things within the organization and go to market. Yeah. This is a big part of that so what's our message how we position and then you know at the sales motions I find.
I don't really nicely and of course last.
Three or four quarters. It as you know those efforts have taken root you'd need a lot of additions to the team you know powerful additions to the team by way of personnel run your new sales leader at the beginning of the calendar year. This year for the identity U.S. business, we'll meet some big strides in Europe, you know about half of our identity.
Business comes from from you.
So in in that regard to feel good about the opportunity to think the unknown and one of the things you heard and Jeffs remarks. There is no. Just what is this mean what is the pandemic and shut down and just a slow down and overall consumer spending big unemployment numbers that we're seeing what does this mean you know to those opportunities.
More importantly to the businesses you know that we have with those opportunities.
I don't know if that provides the color you're looking for but that's probably a smart as we are this far into it.
Got it in in the mobile I.D. business.
How much of that would you see is on line.
And what P. seven is sort of off line at a physical location.
Hadn't broken that out before.
Yeah, not sure I understand the question could you hold on that a little bit.
Sure with your mobile I.D. product.
How much if it could be done from someone living room versus maybe someone has to go into a physical store and use that mobile I <unk>.
Oh, Okay, yeah, thanks for clarifying well [noise] it it it could be 100 per cent done remotely right from from a mobile device, whether that's a a phone I pad or a computer we do have use cases, let's see an easy example, a bank a retail bank location of branch.
Where when you set up an account typically you provide your documents and you know they they take your documents to make a copy of them. You know we we've got these cases, where we do some of that but that's a very very small part of our business. The overwhelming majority of use cases, both the current.
Transaction volumes that we're seeing as well as the pipeline, we just talked about over 95% of those cases are wrapped around the idea that you're doing that remotely.
Got it okay. Thank you.
And our next question.
It's from Robin series.
With William Blair. Please go ahead.
You guys can you hear me okay.
Yeah.
Great. Thank today my question in a nice job.
I guess I, just Wanna talk a little bit on on the current environment, we've already seen through conversations at C.I.O. that it's going to accelerate especially coming out of it the idea of digital transformation and things like that but but you're kind of in the forefront. If some of this right. So if you think about mobile checked all that the idea of during this remotely.
Do you think about I'd verification, now and sort of being able to validate that remotely for all sorts of prophecies, whether it's tough with Doc you sign or things like that I guess I'd love to understand sort of all those competitions orographic your talk liberal pipeline, but a little more color in terms of sort of what do you think the ticket drive conservation or go to market.
Actually with a new itself.
Yeah sure I think it's you know trying to strike that balance between what you're pointing out.
<unk>, which is you know that.
You're a bank and you don't have if you don't have the ability to onboard new customers or a mobile device digitally you know expecting somebody to come down to a branch today's.
It's not impossible, but it's highly unlikely I'll use a couple of examples we're balancing that against you know he's.
Yeah Big falls in G.D.P. high unemployment claims just you know what's happening with the economy you know.
What if that was that due to folks you know how much credit card you since they're going to be in short term how much buying if they're going to be remotely some kind of back to your question. In this current environment that they use case. That's that's kind of relevant example, I can use is anything about Italy, and just being kind of the center of the storm you know a month ago.
And we we've got customers in Italy banking customers in Milan, and <unk> basically signed up but are in the middle of implementation and we we were being urged by those customers and our partners deportation partners. We have to help accelerate those implementation because there was absolutely no way because <unk>. So severe there was no.
Weight is no way for Italian banking customers to go to a branch and so the ability to actually use mobile verify.
Validate somebody like that even if they're an existing customer with somebody like a Buddy bank you know the ability for them to you know validate the transaction over a certain threshold of euros, alright transaction over a a thousand euros, you're going to do a another revalidation using the government issued identity.
<unk> those are the examples of the acceleration just you know simple one in you know are really hot a relative to the pandemic.
Jeff anything you'd add to that.
You know it at is you know the way I view this longer term. This just really reinforces the need them for us opportunity for identification services for every business needs Tranzact digitally so longer term. This is you know oh beneficial.
To a mind to X. trying to do near term, obviously, there's gonna be bumps.
As you know companies, whether they were in or a pipeline or you know looking to do something figure out the impact of the pandemic on their business and what kind of projects are able to pick forward.
Thing is is you know everything we're delivering no I most everything we deliver I think is towards helping companies get more revenue and sign up more customers. So it's you know it's important for businesses to be able to do that well good things and in favor of identity.
Verification.
[noise] somebody maybe let me ask more direct question.
[laughter] Chevies.
Well I guess I'm surprised you wouldn't see it acceleration in the business given people got upset or the checks that you know some are being developed directly to the whole bunch checking caught there's more stopping signed electronically. There's more of these sort of online transactions and so help me reconcile that idea and I understand people or.
Slowly, but but you're embedded in 3000 plus tax both accessing more check all et cetera.
Obviously, you've got sort of a recurring business, it's growing nicely electrical guidance also put those together or maybe just helped me clarified that I mean really helpful.
Yeah, So I'll I'll take on the identity mental that Jeff talk about the deposits a little bits, where the check up.
Model works there I think you know everything you just fed upon is is 100% correct I think that's a great hypothesis and now it's just a matter of when did that hypothesis play out does it take you know 30 days to said take three months does that take nine months for us to to get to that place and you know we're bullish.
And and optimistic that it'll be sooner than later, but.
In the last 45 days and completely you know their mind boggling, it's to the rate of change things to place without absolute zero visibility as to what was happening.
One on the identity side, Yeah, we're watching these things projects accelerates somebody examples I just use the can come back and what Jeff talk about the positive, but you're also doing that into the teeth of.
Huge unemployment claims and the bottom falling out of the economy at least for some period of time I think we're we're trying to balance being responsible.
With you know the optimism we have for the longer term windy and the sales that this ultimately helps you know helps celery.
Kept my chocolate the deposits a little bit.
Yeah, <unk> you know, we definitely expect to see an increase the volume usage.
Due to the.
Oh, the government trucks, it'll be sent out or or being sent out no definitely will flow through the network, but you know blonde keep in mind, the way that whole business works right or all of our customers purchase upfront large blocks and so the usage will need to flow through that but then you know I imagined they'll come back and be report.
Cussing, probably we'll see some about repurchases come sooner so that's definitely favorable for our business.
It is a one we hopefully if at one time thing that the government Fisher issuing all these checks.
But that the that'll be a one time thing that really we will definitely benefit from on the other hand, you know during this you know troubling economy, there's probably going to be a decline and check for the <unk>.
Just to to people, having less money, but also there'll be less payroll checks to to unemployment. So there's kind of a balance there. We expect you know.
Real positive on on deposit usage with or other factors in there as well.
Got it no. It's really helpful. One last one for me just on a quick update on the ruling you know you have such a second really on on the deck will you're talking about could say northern California attack US just love to us that how that's going on what we expect the update have a timeline was illegal stuff in extended or the cove, it and kind of maybe it off.
Milestone sorry, I know the question is buried elaborate sort of.
In the process of covert extend it and then sort of milestones at us and investors should be looking for it after the profit. Thank you.
Yeah. So the the next milestone obviously is this the C.G. action, it's it's never going to be contended in in the eastern district from a timing perspective.
Think it's it's natural to have expected that of course last 45 60 days.
The wheels of justice that normally.
You know that normally grind along it continued to grind the long, it's probably a little slower just because of you know everything we've already talked about and we're all experiencing personally but it hasn't stopped in it. So the timeline remains largely the same.
Okay. Thank you guys appreciate it.
And the next question comes from marked Chapelle.
<unk>. Please go ahead.
[noise] hi, Thank you for taking my question Max starting with you you know I apologize I jumped on the call a little bit late so you may have covered this in your early are prepared remarks.
What if you just review what the company is doing and what steps are taking army cost containment front just to to manage through the the the coded disruptions.
Hey, Mark Yeah, you Miss the best part of the call. It was the front end.
You know from up from a cost containment perspective, I think we're being conservative you know, it's one of the reasons that we've we've pulled the guidance here just because we don't know what to expect in and of course, the next month, two or three but from from spend perspective file I think we're being judicious and you know.
Hopefully you know established our reputation just good stewards of the business and being disciplined in the way that we you know we make these investments we're not pulling anything back you know we were able to as we said in the beginning and all we were able to wear a modern digital business everything that we run it in the cloud all of our employees have have laptops we've been.
Highly secure V.P.N. environment, you can zoom customers for a long time and literally the the day that we announced work from home. The next yeah people put their laptops, you know took the things they needed from their their work areas, Jeff and I included.
Went home and the next day got up and went to work you know it in the kitchen table. So you know I think we're going to continue to be judicious and and consent.
Conservative both in.
The projections, we make but also how we run the business, but we're not pulling back we continue to invest and we continue to grow both sides of this but.
<unk>.
I would just add that we have continued to hire and onward people.
Work from home environment.
Okay, great. Thank you and then Max hundred already business or with respect to the sales organization and aren't they.
I've been a certain focus from you know generating your customers to maybe.
Or just getting your existing customers to to buy more <unk> more of your product <unk>.
Yeah, I wouldn't I wouldn't refer to that as a shifting focus I think we actually have a dual focused at the beginning of our fiscal year October 2019, we split the team. We basically you know took what had been all purpose skoda market team and separated you know kind of new business from <unk>.
Mansion within the hundreds of customers that we have on the identity side and I think that was a natural outgrowth of just continue to get bigger and more mature and wanting.
Italian banks, but we're seeing that across the board, where we're folks that had these digital automation programs are accelerating those.
And that's what we expect to happen I think we should expect that to happen broadly not just a matter of how long that take from and how serious folks are around that.
I missed anything in there Jeff.
I don't think so.
Okay, we'll see that number VIP customer Winkler.
Oh yeah.
I think we track that now with what the resellers for some of the FBI car solutions that we have I mean, there's no risk.
Because the Devil is always in the details as to you know.
More bigger.
<unk>.
Other than that.
Going to have those really big volumes.
So I think tracking that numbers, just not that you're going on it.
Got it thank you.
Okay.
And there are no further questions at this time I would like to turn it back over to Mr. talk early for closing remarks.
Thank you operator, and thank everyone for joining us today, we look forward to updating you again next quarter or call has concluded have a wonderful day.
This concludes today's call. Thank you for your participation you may now disconnect.