Q3 2020 Mitek Systems Inc Earnings Call
Good day.
Systems' third quarter fiscal 2000.
This conference call today's conference is being recorded and at this time I would like to trend.
Okay.
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Thank you operator, good afternoon, everyone and welcome.
Third quarter fiscal 2020 earnings conference call.
Today's call or my Cooksey yellow box Cornacchia CFO John Davis.
Before I turn the call over the box a joke about the cover a few quick.
This afternoon I Trust issued a press release announcing its third quarter fiscal 2020 financial results that race is available in the company's website at Mitek systems.
This call then block that's why the data that's all interested parties and the webcast will be archived on the Investor Relations page of the company's website <unk>.
I want to remind everyone that on todays call management will discuss certain factors that are likely to chose the business going forward.
Just discussed today that are not historical facts.
Cool comments regarding our long term prospects market opportunities should be considered forward looking statements. It's well get the statements may include comments about the company's plans and expectations of future performance.
Forward looking statements are subject to a number of risks uncertainties, which could cause actual results to differ from a true.
Encourage all of our listeners to review, our FCC, probably loans, including our most reset Jim Carrey I'm trying to.
Okay description of these reps.
But on this call. It made up of today July 2020, and the company undertakes no obligation to revise or update publicly I made the forward looking statements can change here.
Well there as a result of your information future events changes and expectations or.
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 reporting opens up a reconciliation between the two for the period.
With that I'll turn the call the Biotechs C. Max.
Thanks, Todd Good afternoon, everyone. Thank you for joining us today.
Before I cover the highlight of our strong Q3 performance, let me first restate our commitment to the wellbeing Mitek community. During these challenging time.
We continue to safely operate at full strength, while working from home and clawed our global team members, who remain highly affected them all aspects of our operation and our delivering on all service level.
[noise] Marchex steadfast snark fitness in power trusting convenience and the digital economy, I mean, we strive to ensure that all businesses are able to operate safely online you are simple to use secure identity verification solution.
Do you reference a recent Forbes article a pandemic has put trust in remote digital Onboarding Center stage.
It's not just banking government benefits help services online education eating company, a gaming or just the sectors witnessing the demand for identity no. Your customer services hope. It 19 has also accelerated the adoption of digital banking and wicket electronic check deposit.
Michael brings a clear market leader with its remote check deposit solution, which is used by more than 7000 financial organizations and has enabled over 4 billion electronic deposits.
During this rapid shift online mitek is proud to provide you secure remote environment that enable digital transactions.
With that let's turn to our strong third quarter results, we delivered record revenue of $25.4 million, representing 16% growth year over year. We also generated non-GAAP net income of $6.8 million or 16 cents per diluted share which is up 42.
3% year over year and cash from operations of $9 million.
That's transactional revenue grew 42% year over year validating the positive momentum in the identity verification market and we continue to experience growth from our highly profitable deposits product line with consumers and businesses adoption and utilization you continuing to increase.
If there was every time when mobile check deposit was essential it is now.
Outside of the expected consumer usage from stimulus checks banks continue doing best significant resources to meet the rising volume of active users in mobile and digital channels.
Therefore, as anticipated growth levels for the mobile deposit business increased this quarter Waldis broken transactions didn't immediately impact our revenue as we sell blocks of transactions in advance this growth in usage will eventually flow through to revenue as banks expand their likes each transaction volumes.
Faster than the plant.
We are proud of our mobile deposit offering and its ability to both assist people in this time of need while also providing layers of defense against fraud.
Now onto identity the cold it pandemic has changed the way we live in work Forever financial services and online marketplaces faced shifting brought landscapes in companies, we consumers that family transacted business, primarily in person I've been forced to embrace it digital first approach.
Need for fast secure remote services is magnified in regardless of where customers more in their digital transformation journey. They are now looking to accelerate it.
Digital identity verification is an essential use case in this new economy using it businesses are able to quickly inaccurately verified legitimate <unk> customers online, which in turn helps them mitigate fraud and stay compliant.
It is therefore, not surprising that adoption of identity verification as a service increased in the quarter several of our customers and partners experiencing higher than normal transaction volumes for instance, some of our bigger gig economy customers went from being a convenient to serving as a lifeline for millions of people always stay at home.
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My check help these customers meet increased demand by enabling them to onboard thousands of new applicants and safeguard their platform for convenient digital commerce.
Similarly, a European customer, who is a leading provider of digital identities in Europe.
With me right right. So the increased demand.
Digital applications due to covert 19 release packages.
They're automated identity proofing process using mobile verify they were able to provide secure access to critical government benefits for citizens impacted by cobot 19.
These two examples highlight miteks ability to scale as well as the short term advantage. We've received from some of our customers in the current environment.
Experts Ms resilience is proven and we are proud to have partnered with our customers. During these challenging times.
It is still impossible to predict the longer term impact the cobot 19 will have on our current customers and our pipeline of potential new customers.
We see some customers returning to normal volumes, while other customers are still navigating the unknown as large swaths of the global economy are being it.
Near term, we continue to execute on our growth plan through channel expansion and continued product development channel partners, who extend our offering into adjacent segments provided positive momentum in this quarter.
One example was our product launch with the Venetian casino and resort.
Mitek mobile verify is incorporated into the Agilysys, our guest express mobile product.
This solution enables hotel guests to check in remotely and bypass the front desk and traditional checking procedures.
Native solution supports the customers need to meet new social dismissing requirements, while also allowing guests to skip long check in lines.
The Venetian reopened on June 4th and preliminary results from our goal I've been very positive having its stature of a hotel at the successful first client is a critical milestones for our partnership Agilysys as they look to be a leading provider of hospitality software two hotels resorts and restaurants around.
The world.
We also signed a new partnership to address the significant opportunity in the E. Notary space in response to cope with 19, many states issued emergency measures, allowing notaries to perform remote online odorization.
At the same time Congress is pushing to pass the new standardization secured Odorization <unk>.
Each would authorize every notary any U.S. to perform remote online odorization, that's complete turnkey digital services in the wake of social this thing that's the thing regulations.
[noise] with Mitek mobile verify you notary users can simply submit a picture of their drivers license or other government issued I'd document along with answering a few questions to quickly determine the authenticity abuser and their identity. This will ensure that sensitive documents are only shared signed and motorized verified.
Parties.
[noise] innovation and product development, our intrinsic parts of our growth plan and adoption of our face compare with likeness detection technology has been very well received in the global markets. Since its launch in February This high assurance biometric signal is an important competitive differentiator for mitek.
Another clear differentiator for Mitek is the caliber of our professional services customer success and support organizations. This quarter was no exception with record implementation. Even go lives collectively contributing to our one of a kind banking grade reputation.
We are committed to helping our customers and partners as they adapt.
Cover faster and attempt to emerge from this price is stronger we continue to invest a talent and innovation and successfully onboard onboarding new hires across the globe through effective remote processes.
In closing, we're pleased with our results which include record revenue and significantly improved profitability I'm proud to lead the mitek workforce, who has rallied to deliver the technology products and services that our customers made me value during these extraordinary times.
The teams division the technology at a market need of a solution that mitek is uniquely positioned to deliver together this amounts to a significant opportunity for all our employees and shareholders.
Now I'll turn the call over to Jeff to discuss the financial results in more detail following Jeff's remarks, well 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 Q3 revenue and operating results.
So the third quarter fiscal 2020, Mitek generated record revenue of 25.4 million, it's 60% increase year over year.
Software and hardware revenue was 13.2 million, an increase of 11% year over year.
Services and other revenue, which includes transactional SAS revenue maintenance and consulting services was 12.2 million for the quarter, an increase of 22% over Q3 last year.
This increase is due to growth in transactional SAS revenue, which increased 42% year over year, 3% sequentially to 7.6 million.
During the quarter as a result for the pandemic yourself varied impact on customer transaction volumes and revenue.
We have certain customers experience large increases in traffic, but then others with large decreases.
The biggest bargain swings were in March and April and began to taper off in May and June.
The net impact for the quarter was an increase in our transactional revenue of 3% sequentially to 7.6 billion.
As we enter Q4 these volume increases falling off.
For two or 320, 20 deposits revenue increased 13% year over year to 16.9 million.
Identity verification revenue increased 23% year over year to 8.5 million.
We delivered strong software and hardware gross margins of 95% for the quarter.
Gross margin on services and other revenue was 76% for the quarter.
Total gross margin for the quarter with 86%, which was consistent with Q3 last year.
Total GAAP operating expenses, including cost of revenues were 24 million compared to 24.8 million in Q3 last year.
This decrease is primarily due to the $3.2 million restructuring charge related to our parents operations recorded in Q3 last year.
Yeah, the decline in acquisition related cost and expenses.
These decreases were partially offset by or continued investments in operations to grow our business and increased litigation cost.
Sales and marketing expenses for the quarter were 7.8 billion compared to 6.9 million in Europe.
R&D expenses were 5.1 billion compared to 4.7 million last year with RG. Other expenses were 5.9 million compared to 5.1 billion a year ago.
GAAP net income for the quarter was 1.3 million worth three cents per diluted share.
Our diluted share count was 42.4 million shares compared to 39.9 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 provided you used to measure of the company's operating results by excluding acquisition related cost and expenses stock comp expense.
Litigation expenses and the related tax impacts of these items.
Non-GAAP net income for Q3 increased to 6.8 million or 16 cents per diluted share compared to 4.8 million or 12 cents per diluted share a year ago.
Our non-GAAP adjustments include 2.5 million to start topic stuff.
1.7 billion of acquisition related cost and expenses 1.4 billion in cash tax difference at 1 billion of litigation expenses for the quarter.
This was offset by the income tax effect of pre tax adjustments of 1.2 million.
Turning to the balance sheet.
We generated 9 million in cash flow from operations during the quarter, bringing our total cash and investments to 52.2 million at June Thirtyth.
Our accounts receivable balance of 12.9 million represent the Dsos were 48 days.
In closing we are pleased with our results for the third quarter, which include record revenues and significantly improved profitability.
Look forward to continuing to deliver the valued service with the Mitek provides.
Operator that concludes our prepared remarks, please open the lines for questions.
Thank you know and if he would like to ask a question.
Pressing star one on your telephone keypad.
Yes.
Make sure that your mute function of turned off.
Again, our one question.
Your first question from Bob I'm, sorry from William Blair.
Hey, Hey, guys. Congratulations this is a great great set of results.
Nice job given the tough tough environments.
I think I want to touch personally I don't think verification side.
You bought it seemed like a nice uptick in demand, especially with some of the partnerships with signature companies loves you touched on remote notary you know you heard Saddam side quite live oak just popped it almost partnerships, how they're progressing and maybe a little bit on the go to market would these partners.
You know significantly larger with a docking sounds like that.
How does that go to market play out did you provide such critical service around that just some color that would be great. Another quick follow.
Sure Paul Thanks to the.
Actually probably among yes, you know that the channel for us augmenting our direct selling with a.
Channel sales has been a.
Big improvement the big progression for us over the course of last 12 to 18 months and we've done that never really thoughtful and you know very intentional way. We're not just you know kind of signing up any partner that raises their hand.
So you know we used the example here that that you notary Agilysys you mentioned the E signature guys and you know a lot of that is where.
What we do with the identity verification or re verification can add value to a bigger process that that they're sitting on top of an E. Signature is a great example, right. We all easy signature all the time, but there's a there's a segment of E signature that requires a step up to a higher level of authentication optune, including now with with the notary. So.
I think you'll see that become a bigger and bigger part of our business. You know, we're best thing not wildly there, but we're investing very thoughtfully there and what we found when when we can get a partner like an agilysys, we'd get a partner like Docusign or Adobe you know once were integrated.
They're able to act as that channel I think to your question about the enablement you know will be enablement is just a.
It's a much easier lift because you're you're basically.
Continuing to repeatedly deliver that same broader application, whether t. signature you notary when the case of Agilysys, but you know what they do for hotels and you know basically being that the life blood or the backbone of of the.
Hotels restaurants and casinos.
That helps no no. That's that's really helpful Yep Yep.
So basically you and and Jeff there, but you know like if I look at that you signature workloads, let's assume you find the vaccine hopefully and we moved past Togut, which I know we will at some point.
And you think about the onetime items right. So.
Signature for you know reduction it doesn't feel like that's going to go back the paper that makes a lot of sense. The idea of someone checking the hotel maybe not people want checking themselves as opposed to an app because the self check and have been available for a while I, but even some traction and then think about mobile check deposit.
He is traction developed going into banks, but when you look at sort of the idea of a onetime item in terms of wrong word, but do you think about the growth rates in the benefits you're seeing how we think about sort of what that might look like in a normalized by the <unk> go to market would be.
Got you guys doesn't go back told we got that are the other parts of north wishing that may be returned to more normalized fashion than how should we think about that thank you.
Yeah. So.
It's it's hard to predict right I mean, you some good REIT animals, but even even with the Agilysys flip itself check in you know self check into evolved the two to avoid the contact is one element, but I think when we embarked on this relationship with Agilysys. It was really more around line busting right. When you walk into Caesars Palace and there's 400.
People in front end the checking and you know you spend two hours on your falling sitting there waiting to get to the front desk to be able to check in so that was the original kind of business case for it I think it's just an accelerated with the contact list, but to your point some of the things we saw in the last four months you know with the financial customers, we have PPP loan.
Yeah, we saw a ton applications go through our customers and our partners in that regard. We use. This example for the government services in Europe, particularly in the UK. Our partner there basically is that it's the front door into getting unemployment benefits from the government of the UK.
And Unfortunately, you know their volumes really spike hard in March April and May and you know I'm Cross my fingers as much as I love that have the business, though cross my fingers that a year from now we're not going down to that level right. Yeah, right. So I know just did I Miss anything in there.
I think you hit it right on the you know I think one you referred to some of the applications are uses but I think we'll just contribute to this becoming more of a norm for people and it'll be a beautiful thing that you see but there are definitely those cases and like we did see in the quarter where there.
For some spikes that you know the way next quarter, we hopefully go see bad you know.
Well, maybe in government services, you know to note. So those things off definitely no retreat and come back down.
Yeah, well and well it's hard to quantify you said you guys given up the transparency into the puts and takes that guys and like I said really nice up congrats.
Thanks Bill.
Thank you.
And our next question will come from Mike Grondahl with Northland Securities.
Please go ahead.
Hey, guys. Congratulations on the quarter first question is just could you talk a little bit about the increased demand.
In mobile check deposit just kind of the level of it I know revenues lag a little bit, but you know what magnitude <unk>.
Yes, so the both anecdotally from you know member banks and then the the actual logs we get from you know the direct banking relationships and then those as reseller providers. The core service providers all indicated that.
The volume of checks going through the systems, you know electronically and based on taking pictures from the phone went up pretty dramatically like.
Serious double digits I'm going to let Jeff talked a little bit to remind everybody as to how the model works there because there'll be a latency between seeing those increased volumes and then actually seeing that matriculate into revenue for us.
Yeah, Mike as you know you understand the modeled for their mobile deposit revenue will flow through later, so you know the banks the partners they purchase.
Big tranches of mobile deposit transactions, they use them up and then come back.
And you know this increased usage there definitely was increased usage during the quarter.
Well you see is a you know I've described to you in the low or no.
10%.
Well above that no close or you know low twentys.
So really good growth in the quarter and usage and then battle flow through no over the next.
Multiple quarters, you know as different banks in processors its fire.
The lots that they've purchased already.
Sure sure [laughter] just to help me out there I mean, some of that some of the bigger banks report those stats in their earnings calls and you can kind of go back through their transcripts like we saw the the note last week from U.S. Bank, where you have added 10% increase greater than 10% increase in mobile deposit checks and a 5% increase in active users of there.
Well there.
Mobile banking software their mobile banking apps, so I mean, they impose out there.
Yes, I wrote about a week or so ago with Wells Fargo said I'm just curious from from your view what you guys saw.
And Max.
What's the current update on pricing power I mean, you've got 7000 bank I don't think law that they customer.
In yet now this products and you've been in more demand do you have pricing power with it kind of where is that.
Yeah, I think we've reported on that pretty consistently Mike I mean, we've been at this now over a year I think the team has yeah.
Pick that up and running with it we're not in any way being unfair with our customers are partners, but we're delivering a tremendous amount of value here. Yeah. We got eyes on that we understand exactly what that value is to the banks each of the partners and you know.
Some of the some of the contracts you know just being renegotiated so that they are there more reasonable for both parties and you're starting to see that years you know.
Basically our results represent increased volumes of checks being processed through mobile apps, and then getting better economics in those relationships as those checks or profit suppose checks are being processed mobily or whether they're being checked.
But the software in the ATM than in the horse using the branches as well. So we you know.
Oh prosecuting that pricing power in each one of those channels.
Got it and then maybe just lastly, I think you said you had record implementation.
In the mobile I <unk>.
Oh elevated where those [noise].
Yeah. So we need purpose shy away from provided to me statistics about go lives and you know how many customers are selling because what we know you know from our installed base of hundreds of customers on the identity side is the biggest customer it's very protos Protos law right and.
You know the top customers <unk>, you don't generate over 50% of the revenue and.
It's not it's not a volume game, it's really a quality game, so but coming back to your question something like 25 additional implementations through the course, the quarter, which was up probably at 25, 30% from the next best quarter, We've had where somebody is actually gone live and end up in production.
It doesn't really tells the tale that the tail is you know who is it one of their volumes and how fast can they ramp once they're in production.
Sure Fair enough, Okay, Hey, thanks, guys.
And again, if he would like to ask a question.
Our one.
Well take our next question.
Hi.
Capital partners.
Go ahead.
Hey, guys and extend my questions have all hope you're well.
So thanks for up on that accompany this mednax. So in terms of kind of quality versus quality, how would you characterize those 25 or so they're small implementations in the quarter Randy.
When you say quantify what do you mean.
Well I mean in terms of the quality of customer I mean super strong logs are going to generate type transaction walk us thinking Oh, yeah, Yeah, that's how I don't think I get it back it.
Yeah. So you'll remember if we go back at the beginning or fiscal year. One of the thinks we talked about Mark. It was our November earnings call was somebody adjustments, we were making to our go to market activities in the identity business for this fiscal year and a big part of that was bringing more focus you talked about focusing in on financial services thing.
Pack and marketplaces for sub market segments. We were after you really clear as to what countries.
You know we were looking for for customers in the UK, Netherlands, I'm, saying that kind of thing and then within that we took an approach where we're really more around target accounts for our sales teams. Our direct sellers don't have geographic territories. They have target account list, where we're fishing.
Professional Spears Fishman next year so the during over Inc. overarching answer. Your question is for the last three or four quarters, we've been very thoughtfully intentional around trying to find the largest lifetime value target accounts that are a good match for what we do not to say, we won't do business with a smaller company or a startup it just means that our into.
Pension is really focused on the guys that we know we can solve their problems, they're gonna get a tremendous amount of value from a relationship mitek identity and likewise when they get production. It may take a couple of quarters, but they're gonna have some really good volumes and you know that.
That's a long winded way of given the context of I'm really happy with you know, we we got some really big names on financial services side, and some really big names on the marketplace side and some some names and fintech that we're going to wake up two or three years from now and they'll be the.
There will be the leaders that you know kind of dominate the market so feel really good about it.
Thanks for that so just what's kind of the pull forward shifts me I'd be listening and things like calling this sort of begs the question 12, extravagant or not like how ensuring that all branches for banking. So what's your position and mobile deposit like I'm just kind of.
Sure that's maybe in the last 90 days, how they're kind of demeanor.
Banks on the I being side and working with you and maybe pipeline changes has it.
Got transpired on products that are being more good shutting up P.D.A. et cetera.
Yeah, well, so I guess, if we break this into two pieces you know in the mobile check deposit.
Good point around branches were kind of in decline before there was a thing like cobot, just demographically and that's both domestically and you've seen that you know in Europe as well.
You know there was a javelin study that came out in June of this year and you know.
Moving to digital the features that banks are using to move to digital mobile check deposit with number one thing. So you know head of his L. Ahead of you know well ahead of some of these electronic peer to peer approaches. So it's much as you know that's a threat to us the peer to peer is a threat to us long term in the short term checks are still a financial.
One instrument [laughter] being used no doubt about it.
And you know more and more being deposited via the mobile app on your phone as opposed to the you know the German Fest ATM or the branch that's closed in your neighborhood yeah for whatever reason.
The second part of that question that identity, yes.
I think what we're going through my assessment of what we're going to last three or four months is.
The banks the financial institutions. The Fintechs that are strong and are going to be able to survive have invested to accelerate their digital automation and transformation activities. There is though the other side of that ledger. There are a number of financial institutions that.
You know some have already you know summary gone could put some of Marty or in some pretty tough you know some some pretty deep water.
And you know that's not within our control, but it's certainly a function of our opportunity in a function of some of our customers.
You know if you if you're not going to make it just because your businesses and sound or because you didn't move to digital basket off that's one less opportunity for us.
That's a balanced view.
Thanks, and just lastly, I'm just any update on.
He that's going on in.
We'll go ahead of your business. Thanks.
Hey, there and there's really not any material update to what's going on there were.
Pretty much.
Where we were at the beginning in the quarter I'm waiting for the courts and the patent office. So no books courts in Texas and then the patent office has several your question. There. So we didn't hear back on those and.
Sure I wouldn't even though.
Great. Thank you.
And with no further questions I'd like to turn call back.
Currently for any closing remarks.
Thank you operator, and thank you everyone for joining us today.
Toward that they're going to again next quarter or call has concluded have a wonderful but.
And this concludes today's conference. Thank you for your participation you may now.
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Oh.
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