Q2 2022 Mitek Systems Inc Earnings Call
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Good day and welcome to the Mitek systems second quarter fiscal 2022 financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Todd currently of MTR Group. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Mitek second quarter fiscal 2022 earnings Conference call with me on today's call are Mitek, CEO , Max Cornacchia and CFO Frank Carl.
I turn the call over to Max and frankly, I'd like to cover a few quick items. This afternoon Mitek issued a press release announcing its second quarter fiscal 2022 of the 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.
I want to remind everyone that on today's call management will discuss certain factors that are likely to influence the business going forward any factors discussed today that are not historical facts, particularly comments regarding our long term prospects and market opportunities should be considered forward looking statements. These forward looking statements may include.
Comments about the company.
These plans and expectations of future performance.
These statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially.
All of our listeners to review, our SEC filings, including our most recent 10-K and 10-Q for a complete description of these risks.
Our statements on this call are made as of today April 28, 2022, and the company undertakes no obligation to revise or update publicly any of the forward looking statements contained herein.
Whether as a result of information future events changes in expectations or otherwise.
Throughout this call, we'll be discussing certain non-GAAP financial measures today's earnings release and the related current report on form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release with that said I'll ask Oliver to protect P O Max.
Thanks, Todd and good afternoon, everyone.
Thank you for joining us today and a warm welcome to our who you team members who are joining for the first time as members of my Tech nation.
I'm happy to report that we again delivered strong financial results in the quarter with revenue growth of 21% year over year non-GAAP net income up 49% year over year in cash flow from operations of $7 $4 million.
Rather than review the quarter I want to focus on the transformative acquisition, we announced a little over a month ago that dramatically expands our addressable market and positions us for accelerated growth in the identity verification and identity authentication markets on.
On March 23, we announced the acquisition of who you'd be.
The uk's, leading Ky see or know your customer technology pioneer who use an orchestration provider for identity verification and identity authentication processes Parker.
Orchestration is an elaborate way of saying that the end to end K Y C process is optimized through our platform. So that customers can easily manage users journeys and accelerate identity decisioning when it matters most having.
Having a single a single platform that easily orchestrates and configured Ky sea journey to manage identities and identify bad actors is becoming a prerequisite for businesses transacting digitally.
To quote Gartner from their 2022 market guide for identity proofing, an affirmation a good orchestration solution will reduce the cost and complexity of multiple vendor integrations, while also enabling granular risks and trust assessment across a range of user events.
Together my texts, leading documents and biometric verification techniques with who use ky seat and configuration services simplifies identity management and puts customers in control of digital access. Furthermore, the platform's low code no code capabilities allows businesses of all sizes to quickly set up in man.
It's the process without meeting an army of developers with this acquisition Mitek is able to address a much larger slice of the digital identity market, including more use cases within existing customers and expanding to adjacent vertical markets.
Mitek has proven offerings are used by the largest banks and global organizations. These large enterprises, mainly the top tier financial institutions in the world have the significant resources needed to solve this problem, including many application developers, but with the onslaught of fraud attacks data breaches and compromised systems almost.
All organizations also need to identify.
Need identity service to verify the identities of those they do business with digital identity verification and Onboarding is table stakes today, and how well organization's control their front doors has far reaching impact long after onboarding.
Our platform offers organizations a more complete picture of the consumer for more accurate decisioning throughout the customer journey. Furthermore, the orchestration capabilities enable mitek customers to optimize workflow and improve efficiencies. These capabilities extend our services to a far broader market as businesses of all sizes.
We can have the same features and functionality as the largest companies without having to develop it themselves.
With this low code no code offering all financial institutions, the fin techs, the challenger banks, the cryptos and pretty much anyone else who needs to know their customer will be able to quickly roll out our curated end to end platform with all of the best identity signals workflow and analytics to address current threat vectors.
Our clients will be able to stand up the entire K Y C processing days not months and to pick and choose what identity signals. They want to use to verify and authenticate their customers, whether it's government document verification face or voice biometrics document likeness device and geolocation information and any other identity signals.
We will be able to provide a seamless way to optimize K y C workflows and put our customers in control of the KFC process.
Any data signals are ever evolving and which ones customers want to use our ever changing with our K Y Z platform, we will offer our clients orchestration capabilities that allow them to use whatever signal they want to use while giving them the flexibility to change which signals they use with ease.
Generally has moved beyond just being an enabler of digital commerce. It now serves as an integral element of most organizations technology stacks 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.
Traditionally companies have focused their energies on establishing proof of identity at the onset of a digital customer journey, such as opening a new account however, establishing trust in a person's digital identity is an ongoing process, especially in light of the data breaches, which increased 68% in 2021.
This massive increases putting even more pressure on getting identity right. This is not a solved problem, it's getting worse and much more complicated, but now we can offer the market a full end to end platform that enables them to fight back.
Commerce shifts to digital businesses have you don't have to balance the need for identification and fraud prevention with a smooth omnichannel customer experience once who use integrated and deployed mitek will be able to provide businesses with a full end to end orchestration platform to optimize and control the entire K Y C process and an easy to deploy.
Manner.
This expands our offerings substantially and will allow us to target significantly more customers, giving us the ability to accelerate the growth of our identity business even further.
We are delighted to have the who you team on board for our exciting journey and we look forward to sharing our progress with you all in the coming quarters.
With that I'll turn the call over to Frank to discuss the second quarter financial results in more detail. Following Frank's remarks, we'll open the call up for questions.
Please go ahead.
Max and thank you might check nation for all your significant contributions this past quarter.
Bridging from Max's remarks, the consumer's raised the digital channels has meant that fraud attack vectors continued to accelerate and increase in complexity.
As discussed the torrid pace of these attacks has been especially difficult for small organizations that lack the internal technical resources and infrastructure to respond and as such has created an urgency for orchestration enabled solutions. While this market momentum emphasizes that magnifies the relevance of identity platforms, we anticipate some headwinds within our core identity business.
As we gear up for greater growth integrating our capabilities in harmonizing. Our go to market efforts is our number one priority the quarters. Following the integration of who you will allow us to minimize the impact that these market dynamics and deliver a platform that is poised to capitalize on growing market opportunities.
That preamble, let's look at Q2 revenue and operating results.
Mitek generated second quarter revenue of $34 7 million or 21% increase year over year software and hardware revenue was $19 3 million up 48% year over year. The increase in software and hardware revenue was primarily due to the contribution of idea R&D and the time, they get mobile deposit Reorders services and other revenue, which includes transactional SaaS revenue maintenance it.
Consulting services was $15 4 million for the quarter down 2% year over year, primarily due to the transition of one customer and the completion of our strategic identity verification project in Europe as a result of our transactional SaaS revenue decreased 4% year over year to $10 5 million.
For Q2, 2022 deposit revenue increased 24% year over year to 21 3 million <unk> revenue increased 16% year over year to $13 4 million we.
We delivered strong software and hardware gross margins of 98% for the quarter gross margin on services and other revenue was 81% for the quarter and total gross margin for the quarter was 90% compared to 887% for Q2 last year.
Total GAAP operating expenses, including cost of revenue were $29 9 million compared to $26 4 million in Q2 of last year and this increase was due to the investment to grow or identity businesses and the additional costs associated with the acquisition of idea Rd and who you are.
Sales and marketing expenses for the quarter were $9 2 million compared to $8 5 million a year ago R&D expenses were $8 2 million compared to $6 seven last year and our G&A expenses were $6 1 million compared to $5 seven a year ago GAAP net income for the quarter increased 88% to $1 9 million or four cents per diluted share diluted share.
Count was $46 1 million shares compared to $44 6 million shares a year ago.
As a reminder, our earnings releases include a reconciliation between GAAP and non-GAAP net income we believe non-GAAP net income provides a useful measure of the company's operating results by excluding acquisition related costs and expenses stock comp expense litigation expenses amortization of debt discount and issuance costs and the related tax impact of these items non-GAAP net income for Q.
Two increased 49% year over year to $10 8 million, a 24 or 24% per diluted share of course desperately share.
Our non-GAAP adjustments include $3 4 million of acquisition related cost expenses, $3 3 million of stock comp expense $2 4 million in cash tax differences $1 7 million in amortization of debt discounts and issuance costs and $286000 of litigation expense for the quarter. This was all upset by the income tax effect of pre tax adjustments of $2 2 million.
Now turning to our balance sheet, we generated $7 4 million in cash flow from operations. During the quarter. We also used $127 1 million in cash to acquire who you, bringing our total cash and investments of $93 4 million at March 31.
As I indicated earlier, we are making the necessary investments to integrate our technology and go to market teams as quickly as possible to magnify the opportunity of who you on our business. We're excited about the addition of Lee which ended the year at just under 10 million of SaaS revenue and is growing nicely higher than our own identity business and the identity market CAGR, what's integrated or platform will help us accelerate that.
Any revenue growth as we said during the acquisition conference call, who has not yet profitable and we expect the investments required to combine our solutions and fund our go to market activities will affect operating margins in the short term as a result, we believe profitability for identity business gets pushed back two to three quarters to the second half of fiscal 2024.
All in all a great investment worth making given the high revenue growth and expanded addressable market. We believe the orchestration platform brings to mitek.
In closing we are pleased with our second quarter results. While we are cognizant of the headwinds I mentioned earlier and as Max indicated the Big News is our transformation transformative acquisition of who you. This is a crucial milestone for mitek as we look to expand our leadership role in the digital identity market orchestration will be an accelerant to our business and allow us to address a significantly larger piece of the idea.
Any market with this acquisition there is no greater combination of identity tools on the market today, operator that concludes our prepared remarks. Please open the line for questions.
Thank you.
To ask a question. Please pick up my star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
And we will go first to take a real measure of William Blair.
Hey, everyone. Congrats on the great quarter and thanks for taking my questions. So just first off.
A more comprehensive platform with orchestration and biometrics and document verification I'd love to hear how your initial customer and partner conversations are changing our customers' understanding of the ROI of combining these technologies into one platform or are they still primarily looking for point solutions sales that they can see.
Which together themselves.
Yeah Jake Thanks, Thanks for the question it's Max.
The transformation that both Frank and I were referring to in our prepared remarks. This is something that we've been working to four five or six quarters right, even pre acquisition of ideal R&D and so.
We gave you a quote out of the most recent Gartner study when it comes to identity and we've seen this week.
We've seen this coming as far as the need for organizations to have a place to coordinate and orchestrate. These various signals to reduce their own efforts and all of the all of the big investments they have to make from an application development perspective for large companies, but as you get into even large companies.
So I just don't have those application developers.
There's a big need there and as you kind of go down to more modern digital businesses that are moving very rapidly.
Writing orchestration layer, it's just not something that they're going to be doing so I think you know Jake.
Our customers or prospective customers the targets. We're after the heart of your question.
They see this they've been talking about it that's that's what triggered our interest going back 456 quarters.
Chip side start to assemble these capabilities and our orchestration has been on our shopping list that entire period of time.
Great. Thanks, and then I don't think you made any comments on it but you've announced a string of new products over the past few quarters with I D lives.
Check fraud defender them can you just talk about how initial customer conversations have been tracking for those products and then maybe some color on the Tam expansion opportunities within these segments I mean still putting up some pretty impressive growth in mobile deposit just curious if you're seeing any signs of that being.
They're being impacted by some of the new products you're offering.
Yeah, absolutely and again I apologize for not covering two many of the new things we have.
Everything seems to be falling in the shadow of the who you acquisition and now getting to the integration and all of the transformation, we have to do to our go to market and our product integration.
Good call out.
<unk> defender was something we announced going back I guess it was about 10 months ago.
And that was the announcement of our intent to build it and get it out there we let that thing up.
February of this year with the first set of customers for the networked hosted.
Cloud cloud offering it's gone really well both the use the adoption and the learning as with any one point O.
Offering theres just a lot of places for us to you know to make improvements and two to.
To make it better in a very short amount of time. So the one point I was kind of the.
The MVP. The most is the minimum viable product most lovable product kind of offering there.
You know the the broader interest from large financial institutions that suffer from check fraud, and those hard dollar losses and the operating costs associated with them has been very positive we were watching our pipelines grow with the top 50 banks the top 50.
Financial institutions. So that's a quick update on check fraud defender with the deposits business or do you live dock was something that was announced by the idea R&D team because it was at money 2020 back in the fall and then.
We live with that.
Just just in the last quarter as far as the production system, they've got a handful of customers for that already we're watching transaction volumes go up really nicely with with these partners and then we've adopted it ourselves. So we're out in the market here in Q3 or Q3 with IV life docs in a in a sandbox, ensuring that it's performing well and additive for.
For <unk>.
For our offerings and the initial the initial data in the initial kind of results of those experiments in the analysis had been very positive. So I'm excited about both of those things and a lot more that we probably didnt cover it.
Great. Congrats again on the great quarter and thanks for taking my questions.
Thanks, Jake Thanks, Jay.
And we'll go next to Allen Klee of Maxim Group.
Oh, yes, good afternoon, congrats on the quarter.
Just wanted to make sure I heard you say that who you.
$10 million in revenue last year.
And if so and then <unk>.
Can you give us some is there.
Some sense of how to think about the margins in and the losses that they had done historically.
Yeah, Alan Thanks for the question Yeah. The first part of that is correct yes.
Last 12 months a little under.
Had a little under $10 million in revenue SaaS transaction revenue similar dry our identity business.
You know it is a lawsuit was a loss making business. It was a startup that was.
Boot strapping their way to to the success and to building out their platform.
We haven't disclosed what that is we recognize that as bootstrap start up.
They were they were trying to do everything they could to conserve cash and you know while they ran a very good business and they have a fantastic team.
We've identified places that we know we're gonna have to shore up and make some additional investments there as well as we just wanted to accelerate the integration for all the reasons, we've talked about the big the.
The big opportunity that we have together and.
And that's I.
I think that's an investment worth making so.
You know, it's not overwhelming investment, but it is substantial.
So how do you think about a potential timeline for for when you think it will be integrated and you can.
<unk> to your bigger customers.
Yeah. So we're on a very aggressive path.
Both to our existing customers, but also the targets that we have and in some of these segments that have evolved to require orchestration that we want to target.
Some of the some of the industries that we just talked about.
We'd like to be able to do in the next 90 days be out in the market.
With something that's demonstratable.
That shows the integration of mobile verify and biometrics along with the core who you platform offering and then be able to turn that into pipeline.
Sales cycles for that kind of business at least historically for who you have been you know 90 to 180 days so three months to six months.
You know kind of building out that pipeline is starting to knock down deals first.
First here in the U S. But then also into continental Europe . So I'll give you a sense of how we think about that.
Great and then I just wanted to last question you mentioned that.
Your services another business and other was down.
And you will see and I think there was a completion you set up your European identity customer project.
Could you explain a little and you also said there might be some.
Some are headwinds and identity of.
I'm not sure I understand I thought most of the identity customers were more transactional of kind of what youre alluding to for for the identity segment. Thank you.
Sure. So we did a we don't.
Normally do a lot of project based business, but we did have an existing customer that uses us on a transaction basis that came to us about two years ago and asked us to do.
A substantial re verification project that project lasted about two years. It was quite successful, but it has now concluded and so it's just created a very difficult comp for us in the period that was a substantial.
Consider a headwind and we're gonna have to deal with that comp over the next three quarters.
And then the other headwinds that Frank was alluding to was just you know the ongoing evolution of some of these market segments that are requiring orchestration and that's we've seen that coming.
Been actioning against that looking for targets in acquisitions to kind of fill that fill that requirement and now we have it in that kind of brings us back to.
You know.
The exciting transformation that we have now in combination with who you.
Great. Congrats thanks, so much.
Thanks Al.
And as a reminder, it is star one.
One for questions at this time.
And we'll go next to Mike Grondahl of Northland Securities.
Yeah, Hey, Thanks, guys and good afternoon, Hey, Frank could you just repeat mobile check in mobile <unk> growth in the revenue numbers year over year and then what you said about transactional SaaS you were going pretty quick there and I don't think I caught it all.
Yeah.
Yeah, I'm happy to do that let me just go to the notes real quick.
Let's see so.
Just from the beginning again, a $34 seven for the total software and hardware was $19 three up 48% are obviously big contribution that was the idea of R&D and the timing of mobile deposits.
And then deposit revenue was up 24% year over year to $21 3 million.
'twenty up 24% to 21, three and then mobile idea was up 16% to $13. Four that's right revenue, that's probably like a net revenue of 16% to $13 four.
Okay and what.
The transaction SaaS revenue did I hear that is down 4%.
Yes.
That's just indicated.
Largely driven by the you know as we discussed and completion of that large project based work, we do for that customer.
Got it.
Flipping to mobile check for a minute.
Where the Reorders.
On the high side for you I know it's lumpy.
Just kind of frame that a little bit and then just any any comment on pricing in mobile check.
Yeah, I don't think there's a big update Mike on on pricing.
We've been doing what we've been doing now for two and a half years from pricing.
Pricing discipline perspective, we just continue to do that I don't think theres anything.
Outsized or significant that we would report in Q2 with that.
And then as far as just you know kind of how the how the reorders late in nothing unnatural.
These are the folks that were scheduled to be reordering now and they did it in.
I think we've talked we've talked before you know some of the 10 year history. We have in this business of being able to do regression analysis and determine when some some entity is going to be prepared for a for a reorder is been a little more uncertain times, just because they had such big reorders in the beginning.
Because of the adoption the increased adoption of.
Depositing checks through through mobile devices in the beginning of Covid, but it seems like that behavior is sticking.
Books arent reverting to going back to going back to the branch to deposit checks.
Sure sure well, 24% growth pretty nice.
Pretty nice that's for sure.
Frank you kind of you know you talked about you're going to be making additional investments and you use the word substantial as it related to who you are.
That.
The $10 million, you know kind of like a couple million dollars a quarter that we layer in just give us a little framework around that.
Yeah, Mike just briefly as Max indicated we knew coming into it because as you.
He said there are you know they kind of bootstrap their way to what they were doing there were some areas. We can shore up and Theres also an accelerant, we can pour into this and making those investments so.
Where we're looking at that we know where we have to invest we're not quantifying it but its all designed as Max indicated to get us into a demonstrable product in market in 90 days and then starting to build pipeline 90 to 120.
We factored that in that was part of the acquisition thesis, what we would have to do the shored up and to accelerate and.
Those costs are we're focusing on now what areas to show up and how to deal with us through the how we focus on it.
Got it Okay, hey, thanks a lot.
Yeah, great. Thank you Mike.
At this time, we have no further questions I would now like to turn the call back represented for any additional or closing remarks.
Thank you operator, and thank you everyone for joining US today, we look forward to updating you again next quarter. Our call has concluded have a wonderful day.
And again this concludes today's call. Thank you for your participation you may now disconnect.
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