Q2 2021 Mitek Systems Inc Earnings Call

Please standby.

Good day and welcome to the Mitek systems second quarter fiscal 2021 financial results Conference call. Today's conference is being recorded at this time I'd like to turn the comments over to Todd Curly MTR Group. Please go ahead Sir.

Thank you operator, good afternoon, and welcome to Mitek second quarter fiscal 2021 earnings conference call with me on today's call are Mitek, CEO Baxter, Nokia and CFO, Jeff Davis.

For 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 of fiscal 2021 financial results that release is 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 web site on.

To remind everyone that on today's call management will discuss certain factors that are likely to inflows for the business going forward any factors discussed today that are not historical facts.

Similarly 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 for future performance for them.

Looking statements are subject to a number of risks uncertainties, which could cause actual results to differ materially we encourage all of our listeners to review our SEC filings, including our most recent form 10-K and 10-Q for a complete description of these risks our statements on this call are made as of today April 29 2020.

And the company undertakes no obligation to revise or update publicly any of the forward looking statements contained herein.

As a result of more information future events changes in expectations or otherwise.

Throughout this call, we'll be discussing certain non-GAAP financial measures today's earnings release on 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 on I'll turn the call over to Mitek CEO backs.

Thanks, Todd good afternoon, everyone.

Thank you for joining us today I hope you and your families are staying healthy and safe.

First I want to commend the mitek team for their continued hard work.

Because of your dedication and determination Mitek delivered record second quarter revenue with exceptional performance across both lines of business for the second consecutive quarter, our identity verification revenue grew more than 45% year over year, highlighting our leadership in this high growth.

Market.

Our deposits business also continues to deliver solid revenue growth driven by increasing consumer adoption.

All of this resulted in revenue of $28 $8 million up 24% year over year.

Also we delivered non-GAAP net income of $7 $3 million or 16 cents per diluted share up 34% year over year and cash from operations of $7.3 million.

We remain energized by the rising momentum in the identity verification market with digital identity solutions rapidly emerging as the next day building trust and doing business online.

More and more of our existing customers are expanding identity verification well beyond the initial on boarding use case and this quarter. We added numerous new customers outside of the financial services as we help organizations and telecommunications market places and technology establish an appropriate identity very.

Vacation solution.

Identity verification has never been more relevant.

<unk> advances in artificial intelligence are enabling not novel forms of fraud and increased scale and frequency of data breaches on.

All of which is adding heightened pressure on organizations to protect customers' data and access.

As I recently wrote for the Forbes business Council being able to secure users' data has become a business imperative.

To prosper long term companies that rapidly transitioned to online commerce now must demonstrate to customers that they can be trusted to protect their data online.

Organizations no longer have the luxury to simply verify access at the point of on boarding.

Instead, they need to continuously authenticate and know exactly who their customers are a cross channel and throughout the customer lifecycle.

Accordingly.

According to javelin annual identity fraud study $56 billion was lost in combined identity fraud and identity fraud scams in the United States in 2020.

39 million American consumers were impacted with a loss per fraud incident of 1300 $50.

Most alarming was that more than half of consumers victimized by identity fraud experienced total account takeover laws across multiple accounts. These numbers are staggering and validate the significant new investment being made in identity verification is an integral function to fight fraud online.

The growing usage of digital channels for Commerce presents the perfect opportunity for criminals to commit fraud. So we need to come together as an ecosystem and deliver stronger forms of authentication javelin recommend and I quote biometric and behavior analytics should be used from beginning.

And across digital platforms to help continuously authenticate transactions.

Well authenticated identity verification using both passive and active biometrics is primed to solve this problem.

[noise] entity verification is rapidly becoming an integral element of most organizations technology stack and we believe the next decade of fraud prevention will be defined by an organization's approach to the lifecycle of continuous identity and access management capabilities.

Mitek is the only enterprise class provider in the identity category and our standards of service remain unchallenged.

Our approach is to provide advanced Linkedin layered identity signals from initial on boarding with documents devices and biometrics to authentication re verification and continuous identity fraud detection.

Our customers globally represent hundreds of the world's best known brands in banks and our proven track record of success continues to grow as we expand our reach into this fast growing market.

Mitek the ambition is to be an indispensable partner in fighting identity fraud for the markets and geographies, we target and the momentum we are experiencing is evident.

Looking forward our pipeline of potential new customers is strong our existing customers are expanding their use of mobile verify across multiple use cases, and our channel partnerships are gaining traction.

As the industry, leading solution for identity verification, we are committed to maintaining product superiority and expanding our reach into this large and growing market.

We are committed to innovation and delivering products that are simple and intuitive to use while protecting organizations from the growing threat of fraud.

Turning to our deposits business.

Banking usage continues to increase every quarter.

This quarter J P. Morgan Chase reported 9% increase in mobile banking users to $41 9 million customers and Wells Fargo reported active mobile banking customers increased 8% to $26 7 million.

Along with this increase in mobile banking adoption mobile check deposits was rated the most valuable mobile banking App feature in 2020. According to a recent Forbes survey.

Similarly, 70% of consumers surveyed by cornerstone advisors in 2020 set depositing a check it was one of the most important mobile banking features and 85% intend to continue deposits checks using their mobile devices in 2021.

As a result of this increase in customer adoption, our highly profitable deposits business continued to grow during the quarter with its revenue increase increasing 18% year over year.

Surprisingly, 42% of consumer survey used mobile deposits for the very first time in 2020, indicating the sizeable opportunity for growth and continued adoption.

And 7500 financial institutions that use our mobile check deposit solution are pushing for mainstream consumer acceptance as it represents a significant cost savings for them.

So don't be surprised when you see a TV ad.

<unk> Samuel L. Jackson, Charles Barkley and Magic Johnson, telling you that using mobile deposit is a magical experience. It is and we look forward to continuing adoption of our deposits product as more and more consumers discover its ease and convenience.

In closing our strong results show the central role that our products play in this digital economy.

The acceleration in demand for our identity verification solutions is ongoing.

And our record revenue demonstrates how we are strengthening our market position in 2021 and beyond.

Now I'll turn the call over to Jeff to discuss the financial results in more detail and following Jeff's remarks, we'll 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 Q2 revenue on operating results.

For the second quarter of fiscal 2021, Mitek generated record revenue of 28.8 million on 24% increase year over year.

Software and hardware revenue was $13 million, an increase of 14% year over year.

Services and other revenue, which includes transactional SaaS revenue maintenance and consulting services.

It was $15 8 million for the quarter, an increase of 34% over Q2 last year.

This increase is due to growth in transactional SaaS revenue, which increased 50% year over year to $11 million.

The transactional revenue was positively impacted in the quarter due to higher revenues from a few customers with related increased transaction usage.

While we are very happy with the significant growth year over year. This revenue may not continue at these increased levels in the next quarter.

Also as we look forward I would point out for Q3 will be our first comparable quarter on a year over year basis since the pandemic began.

As you May recall in Q3 last year, we saw significant increases in transaction volumes related to the pandemic, which will impact on comparable growth rates.

For Q2 'twenty.

For Q2 deposits revenue increased 18% year over year to $17 2 million identity.

Verification revenue increased 35% year over year to $11 6 million.

We delivered strong software and hardware gross margins of 95% for the quarter.

Gross margin on services and other revenue was 80% for the quarter.

Total gross margin for the quarter was 87% compared to 86% in Q2 last year.

Total GAAP operating expenses, including cost of revenue were $26 4 million compared to $22 1 million in Q2 last year. This.

This increase was due to increased cost of revenue associated with higher revenues.

And increased expenses due to investments to grow our identity business.

Sales and marketing expenses for the quarter were $8 5 million compared to $6 7 million a year ago on.

R&D expenses were $6 7 million compared to $5 $6 million last year, and our G&A expenses were $5 7 million compared to $5 2 million a year ago.

GAAP net income for the quarter was $1 million or <unk> <unk> per diluted share.

Our diluted share count was $44 6 million shares compared to 42 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 of the company's operating results by excluding acquisition related costs net expenses stock comp expense litigation expenses.

Amortization of debt discount and issuance costs and the related tax impact of these items.

Non-GAAP net income for Q2 increased to $7 3 million or <unk> 16 per diluted share compared to $5 4 million or <unk> 13 per diluted share a year ago.

Our non-GAAP adjustments include $3 million of stock comp expense $1 7 million of acquisition related costs and expenses.

One 1 million of amortization of debt discount and issuance costs, one 6 billion in cash tax difference.

275000 of litigation expenses for the quarter.

This was all offset by the income tax effects of pretax adjustments of $1 4 million.

Turning to the balance sheet, we generated $7 $3 million in cash flow from operations during the quarter and completed a successful convertible debt offering, adding approximately $150 million in cash to our balance sheet free.

Our total cash and investments at March 31 to $219 5 million.

Our accounts receivable balance of $14 2 million represents a DSO of 50 days.

In closing we are very pleased with our results which include record second quarter revenue and non-GAAP net income as well as strong cash flow from operations.

We look forward to reporting our continued progress on the coming quarters as we help our customers and partners accelerate their digital transformation, while at the same time mitigating fraud.

Operator that concludes our prepared remarks, please open the line for questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to life's not treat chart equipment again press star one to ask the question.

Yeah.

And we'll take our first question from <unk> <unk> with William Blair.

Hi, everyone. This is actually Jake on for Gabon.

I'm, just curious and interested to hear how you're thinking about capital allocation given the recent raise how you're balancing investment in sales and marketing versus the potential for inorganic M&A just given the recent growth you're seeing in I'd verification.

Hey, Jake Thanks for thanks for calling in thanks for the question.

Yes, I think we you know we just built it up the convert cash it was the beginning of February so it's still relatively fresh and we talked about the use of proceeds at that point, primarily focused on primarily focused on acquisition I think that's number one on the list number two on the list number three on the list and then you get down to a number for and it's it's probably.

Other things within the business with the top three priorities there would be around acquisition.

Awesome and then just as a follow up just curious if theres any update on the CFO search and how the process is tracking.

Our process continues to roll on.

Uh huh.

Great question and you know, we're very fortunate to have Jeff on the face set of hands here to help us we're going through this.

Kind of set your expectation, we're still probably a couple of months away from getting that getting that fully resolved, but stay tuned.

Sounds great. Thanks for taking my questions.

Next we'll hear from Mike Grondahl with Northland Securities.

Thanks. This is Michael on for Mike Thanks for taking the questions.

Just first on like sales force positioning as we move towards the later half of this year is there any thoughts about that certain industries are use cases, where it's generally expect to see a lot of strong growth can you just talk about that.

Mike on for Mike.

Thanks for the thanks for the question Mike Yeah, you know I think we went into this year with a really clear and it was very targeted and focused approach to our go to market not just domestically, but internationally as well where we had.

Focused on specific segments financial services Fintech marketplace accounts, and then the top targets with within each one of those target accounts named accounts.

Both direct and through our channel partners I don't think we're going to you know we're halfway through our fiscal year I don't think youre going to see us change that I think as we start to think about next year may explore investigate if there are ways to expand that and.

Open the aperture, a little bit, but premature to premature to kind of be making any predictions on that.

Got it thanks, and just on mobile deposit.

Say that some of that kind of rolls for the way those contracts are structured with resellers were low.

Benefit we saw for the last 12 months or so is going to still kind of.

Push forward a quarter or two.

Oh, Yeah, I'll, let Jeff add some comments on how that debt revenue model works, but yes, I think that what the <unk> and everything that's been issued by the government I mean, that's that's out there, but we haven't necessarily seen that kind of work its way through the resellers and the core service providers to actually show up as increased revenue for us yet I don't know, Jeff do you want to.

Add to that.

Yes, just debt.

I think you understand the way the contracts work on that'll flushed through the system as they reorder the depleted inventories.

Would add though that.

This quarter, we continued to see 'twenty.

20% plus increase in usage over the last year in mobile deposits.

Just on checks being process so.

It still remains very strong now next quarter should be the first anniversary again on the pandemic. So.

We'll see how that one year lapping impacts net increase check usage next quarter, but this quarter. It was still strong over 20%.

Got it thanks, I'll hop back in the queue.

Well now hear from Hamzah <unk> with Jefferies.

Hey, good good afternoon. Thank you a.

Just on the identity on on the M&A pipeline could you maybe size that debt up and and maybe just talk about how your offering is different from some of the bureaus have done deals like kind of on a.

You know Mastercard the card on just just talk about sort of the pipeline, how you're offering differs in its fragmentation on opportunity in this space for you.

Yeah. So I think you start with the answer right. There you know identity as a it's still an early dislike any particularly its an early stage category, it's fast growing it's.

It's.

Green leaf fragmented and for the things that we do we find it to be very localized meaning.

The way that identities is validated and then authenticated you know in different countries, it's subject to the subject to the local.

The local laws so yes.

With so many companies out there having entered the space and so many different approaches.

You know I'm not going to name names I'm, not gonna named companies and I'm, probably not even named category, but we just think staying close to our customers and taking this market first approach, where we've got some of the largest banks in the world and some of the most advanced fast growing fintech in the world.

Selling us what they're looking for and how they want it laid out how they want it orchestrated how they want those signals to work, we're going to use that as on regarding light as to who we should be talking to as far as potential targets for acquisition.

Got you and just my follow up question I'll turn it over on on the deposit side.

Do you have sort of an idea of where our adoption sits today I know you mentioned post.

Post COVID-19 it does you know.

Clearly greater adoption during COVID-19 and you know maybe post COVID-19 too, but maybe you can touch on why our adoption sits in and are you seeing some of the smaller banks also increasingly use mobile deposits I know you mentioned some of the larger names already thank you.

Yes, let me take the back half of that question first small bank Big Bank Community Bank Regional Bank credit Union.

<unk> digital bank.

Bank, they all use mobile deposit that debt.

You know the 7500 financial institutions represent.

The head of the snake in the long tail of the U S financial industry. So everybody.

If you want to do mobile deposits, you're showing up with mitek.

On the front of that question is the harder one to take on before the pandemic adoption, we were being told by the banks that on average the adoption was about for retail checks for the high teens.

Something like 17, 18, 19% of retail checks for being deposited via mobile device and then there's been there's just there's a lot of information out there around how folks were kind of force to to adopt because branches were closed or they don't want to go touch ATM machines.

Well, we don't have a good handle on is on average across those 7500 institutions.

Is that now mid Twenty's is it is it higher or is it slightly lower.

So I'm sorry, not to be able to give you something more precise or with higher confidence.

What we do when we do talk about internally when we do our strategic planning and what our customers have validated for US is there's no reason that over time.

The adoption of mobile check deposits should not be you know.

At least half of all retail checks, there's just no longer a good reason for that and I think we've shown that the adoption when force the adoption can happen pretty pretty quickly.

But we will take the action as we get better information on so we're happy to share it with the with how that adoption trend continues to mature.

Great. Thank you so much.

And as a reminder, press star one if you have a question well here for Mark Chapell with benchmark.

Hi, Thank you for taking my question and nice job on a quarter just starting with you in your prepared remarks, you noted that some of the <unk> transactional revenue was likely won't repeat next quarter. I was just wondering wonder if you could clarify why this revenue is likely not to repeat or.

Some of it anyway.

Sure.

In the second quarter.

A handful of customers that.

Just reached higher transaction levels that are more likely to be.

Repetitive maybe onetime in this quarter. So they may not repeat next quarter.

So as Mike.

Really the crux of my point there is.

Specific transaction specific customers.

Okay, great. Thanks, and then.

Max in the past you've noted that there may be some opportunities for price increases and mobile deposits I was wondering if.

If that's still an ongoing initiative at the company and whether you've had any success on that front.

Yeah, well, thanks for thanks for bringing us back to that Mark.

Whether it's price increases or just general improved economics within these contracts as they come up for renewal and renegotiation.

You've talked about this.

Consistently over the course of the last six or seven quarters that we've taken affirm for them stand on that.

You know not because were ruthless piety.

Private tiers, but because our customers are getting a tremendous amount of value from these products and when those contracts for stood up many many years ago in some cases decades ago.

The terms were not fair they just were not reasonable to mitek and so we've.

We've continued to we continue to prosecute that that issue and its slow but steady work and we reviewed the results of that in our quarterly business reviews.

Every 90 days and you can see it just nicely.

Not a hockey stick, it's just a nice steady trend up into the right and we'll continue to do that.

Great helpful. And then finally here with respect to your <unk> business I was wondering if you saw any strength or weakness in any particular geography.

Last quarter, we saw strength in just about every geography.

It was a banger of a quarter I know, Jeff touched on some of these one time things but.

When you take.

The the really good year, we had in FY 'twenty the strong quarter, we had in Q1 and now an even stronger quarter in Q2.

We can feel it its there and we're seeing it cross geography cross industry.

This is a problem that just about every organization needs to figure out how to take care of.

Thanks, that's all for me.

Yeah.

And once again press star one if you have a question, we'll pause for a moment.

And that will conclude today's question and answer session on I'll turn the conference over to Tom Carley for any additional closing remarks.

Okay. Thank you operator, and thank you everyone for joining US today, we look forward to updating you again next quarter. Our call has concluded and have a wonderful day.

And that will conclude today's conference. Thank you for your participation you may now disconnect.

Okay.

Okay.

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