Mitek Systems Inc Q4 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the Mitek Systems Fourth Quarter and Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, it's my pleasure to turn the conference over to Todd Kehrli, MKR Group. Sir, please begin.

Thank you, operator. Good afternoon, and welcome to Mitek's Fourth Quarter and Full Year fiscal 2021 Earnings Conference Call. With me on today's call are Mitek's CEO, Max Carnecchia; and CFO, Frank Teruel. Before I turn the call over to Max and Frank, I'd like to cover a few quick items. This afternoon, Mitek issued a Press Release announcing its fourth quarter and full year fiscal 2021 financial results. That release is available on the company's website at miteksystems.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that on 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'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. We encourage 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, November 4, 2021, and the company undertakes no obligation to revise or update publicly any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations or otherwise. Additionally, 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 now turn the call over to Mitek's CEO, Max.

Thanks, Todd. Good afternoon, everyone, and thanks for joining us today. Fiscal 2021 was another outstanding year for Mitek as we achieved record revenue, earnings, and cash flow from operations. Our market-leading fraud-fighting offerings delivered strong growth during the fiscal year as our customers and partners accelerated their digital transformation and increased their fight against fraud. Before looking at the numbers, I'd like to first congratulate Mitek’s mission on another stellar year. Mitek has never seen better execution or greater momentum and each of you showed commitment and tenacity to deliver the best solutions and services for fighting the never-ending increase in fraud in the world of digital commerce. In the fourth quarter and throughout fiscal 2021, we delivered strong results against the backdrop of economic uncertainty and the lingering impacts of the COVID pandemic. In doing so, you have each demonstrated the resiliency of our business and validated our growth strategy. Quickly looking at the numbers for fiscal 2021, we recorded record revenue of $119.8 million, representing growth of 18% year-over-year. We also generated record non-GAAP net income of $34.2 million or $0.76 per diluted share, up 19% year-over-year and record cash flow from operations of $37.4 million. We accomplished a lot in fiscal 2021 beyond just our record financial performance. We provided exceptional customer value to the world's leading banks, fintechs, and marketplaces as they look to move more and more of their businesses online in a secure and trusted way. Mitek is distinguishing itself as a critical component in the fight against fraud. During the year, we made key investments in people and technology as we look to expand the breadth of our product offerings and the markets we serve. With our acquisition of ID R&D, we added award-winning AI-based voice and face biometrics and liveness detection technology, providing increased protection against today's most sophisticated fraud threats. Rapid advances in AI are enabling novel forms of fraud and increased scale and frequency of breaches, which is adding heightened pressure on organizations to protect their customers' data and access. ID R&D's multimodal approach to identity authentication directly addresses these threats by combining leading passive facial liveness and voice anti-spoofing technologies so that we can accurately identify and prevent advanced AI-based deceptions and ensure each transaction is being completed by a real person and the right person. Organizations no longer have the luxury to simply verify access at the point of onboarding. Instead, they need to continuously authenticate their customers throughout the customer journey. With our acquisition of ID R&D, Mitek is again leading the industry with its use of advanced linked and layered identity signals to continuously fight fraud. From the initial user onboarding of documents, devices, and biometrics to authentication and re-verification and continuous identity fraud detection, Mitek is the only enterprise-class provider with this breadth of offering in the identity market. As a result, we continue to see customers choose Mitek to provide trust in the digital world. The 32% revenue growth we saw in our identity business this year is evidence of our success. Our customers globally represent hundreds of the world's best-known brands and banks, and our proven track record of success continues to grow as we expand our reach into this growing market. During the year, we also further executed on our product roadmap with the launch of Check Fraud Defender, which bolsters our already highly successful deposits business. Check Fraud Defender is the first AI-powered cloud-hosted network for financial institutions to counteract check fraud. In 2020, attempted check fraud totaled a staggering $15.1 billion in the U.S. alone. Check Fraud Defender helps protect against the growing complexity of check fraud attacks, enabling banks to reduce fraud losses, lower false positives, and reduce the substantial operational costs associated with managing check fraud. Launched only in the last quarter, 20% of the top 25 U.S. banks have already licensed Check Fraud Defender technology and are experiencing up to a 90% operational cost savings following its initial deployment. This savings doesn't include the reduced fraud losses they are experiencing as a result of using this new powerful signal to fight fraud. By automating check fraud detection and lowering false positives that require manual review, Mitek can decrease banks' operational costs as well as fraud losses. We are very excited about this new deposits product offering that joins our already highly profitable mobile check deposit business, which continued to grow during the year with its revenues increasing 11% year-over-year. Looking to fiscal year 2022, I'm going to speak more broadly today about the key reasons why we believe that Mitek is even better positioned for growth than before the pandemic. Digital engagement is a key driver of economic growth, and inclusive participation requires access to high-trust identity verification services. From a consumer perspective, everyday access is enabled by identity-based technology. From unlocking a phone to signing up for grocery deliveries, our identities are shaping the way we access goods and services. From a business perspective, verifying the real identity is a critical enabler from a regulatory and compliance perspective and an essential step for a trusted customer experience. Recent research from MarketsandMarkets confirms that the biometric segment will hold the largest market share in the digital identity solutions category. We believe biometrics offer greater security and convenience for consumers who don't have to worry about remembering complicated passwords or compromised knowledge-based authentication questions. Another concern is deepfakes, which we address today with liveness detection, a computer vision technology that detects the presence of a living user rather than a photo, recording, masked person, or manipulated media such as voice or media. As the shift to digital transactions picks up, so do fraudsters, so businesses have an urgent need to adopt new identity verification approaches. In the financial services sector, for instance, the percentage of banking products consumers can open through a digital channel has jumped from 43% to 76% over just the past 2 years, and about 90% of these can be opened from a mobile device. So getting identity right, especially where there is a high consequence to getting it wrong, has never been more important. As a key component in the identity authentication and authorization layer, our ability to combine our multimodal biometric analytics, harmonization of digital identities to real-world authentic government-issued documentation and global view of identity uniquely positions us to resolve identity when it most matters. Our investment in ID R&D demonstrates our continued commitment to fighting fraud in the identity market and our determination to provide trust in this digital world. Just last week, ID R&D released ID LiveDocs to help our customers prove the legitimacy of a document. Bad actors use digital images of valid or altered driver's licenses, passports, and other identification documents in their attempt to spoof identity verification processes. ID LiveDocs tests for document liveness and uses AI and computer vision to distinguish between an original document and a digital image of a document shown on a mobile device or computer display. ID R&D will continue to develop the sophistication of their face liveness solutions, which we believe is essential in any effective identity management solution today. Facial liveness is rapidly emerging as the preferred method to ensure the integrity of face biometrics for digital access and enhance the customer experience. Face recognition can accurately answer the question, 'Is this the right person?' It doesn't answer the question, 'Is this the real person?' hence, the need for liveness detection. ID R&D offers the leading solution in this regard. In fiscal 2022, we expect to invest further in strategic acquisitions to accelerate our innovation in the fight against fraud. In FY '22, our investments in biometrics and the rising role they play in managing online fraud and enabling imperceptible access will increase. In closing, our ability to rapidly respond and execute to the accelerated requirements for digital access yields record financial performance in fiscal 2021. The growing demand for our market-leading fraud-fighting offerings shows the pivotal role that our products are playing in providing trust in the digital economy. We're humbled by our role as a trusted partner and business enabler in this pursuit. As we enter fiscal 2022, we believe we are well-positioned to take more share as the clear leader in digital identity verification, strong growth with our innovative biometric and authentication technologies, scaled automation solutions, and the rise of our fraud network will continue to position us as a market leader. Our globally trusted brand and team of fraud experts remain committed to all of our customers and partners in our collective quest to fight fraud and abuse and enable trusted digital access. Now I'll turn the call over to Frank to discuss the financial results in more detail. Following Frank's remarks, we'll open the call up for questions.

Thank you, Max. Congratulations to Mitek on so many great accomplishments and another great year. Thank you, everybody, for joining us this afternoon. I'd like to start with Q4 revenue and operating results. For the fourth quarter of fiscal 2021, Mitek generated record revenue of $33.3 million, a 9% increase year-over-year. Software and hardware revenue was $17.8 million, down 1% year-over-year. The decline in software and hardware revenue is due primarily to lower software revenue from our legacy on-prem ID products, which are being discontinued as well as the timing of Mobile Deposit reorders. Services and other revenue, which includes transactional SaaS revenue, maintenance, and consulting services, was $15.5 million for the quarter, an increase of 22% over Q4 last year. This increase was primarily due to the growth of transactional SaaS revenue, which increased 26% year-over-year to $10.2 million. For Q4 2021, deposits revenue increased 2% year-over-year to $21.9 million. Identity verification revenue increased 24% year-over-year to $11.3 million. We delivered strong software and hardware gross margins of 99% for the quarter. Gross margin on services and other revenue was 81% for the quarter, and our total gross margin for the quarter was 90% compared to 88% in Q4 of last year. Total GAAP operating expenses, including the cost of revenue, were $28.9 million compared to $24.6 million in Q4 of last year, and this increase is due to investments to grow our identity business and the additional costs associated with the ID R&D acquisition. Sales and marketing expenses for the quarter were $8.4 million compared to $7.3 million a year ago. R&D expenses were $8.2 million compared to $6.1 million last year, and our G&A expenses were $6.1 million compared to $5.9 million a year ago. GAAP net income for the quarter was $2.2 million or $0.05 per diluted share. Our diluted share count was 46.2 million shares compared to 43 million shares a year ago. Now 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 compensation expense, litigation expense, and the related tax impact of these items. Non-GAAP net income for Q4 decreased to $10.1 million or $0.22 per diluted share compared to $11.4 million or $0.26 per diluted share a year ago. Our non-GAAP adjustments include $3 million of stock compensation expense, $2.9 million of acquisition-related costs and expenses, $1.3 million in amortization of debt discount and issuance costs, $2.2 million in cash tax differences, and $330,000 in litigation expense for the quarter. This was all offset by the income tax effect of pretax adjustments of $1.8 million. Now looking to the results for full 2021, revenue totaled for the year, a record $119.8 million, an increase of 18% year-over-year. Software and hardware revenue was $60.1 million, up 11% from the prior year due primarily to the growth in mobile deposits, offset by lower software revenue from our legacy on-prem ID products. We maintained very strong software and hardware gross margins of 96% for the year compared to 94% in 2020. Services and other revenue was $59.7 million for the fiscal year, an increase of 27% over the $47.2 million in 2020. This increase is primarily due to the growth in transactional SaaS revenue which increased 38% to $40.2 million. SaaS transactional volumes increased 40% year-over-year and services and other gross margins of 80% for the year, up from 79% in 2020. For our full fiscal 2021, deposit revenue increased 11% to $75.5 million, driven primarily by increased consumer adoption of mobile deposits. Identity verification revenue increased 32% to $44.3 million, driven by 36% growth in transactional revenue, which was partially offset by a decline in revenue from our legacy on-prem solutions, which are being discontinued. Total GAAP operating costs and expenses for 2021 were $106.1 million, an increase of 15% compared to total operating expenses of $92.4 million in 2020. This increase is due to additional investments made throughout the year to fuel our growth in the identity business and additional costs associated with the acquisition of ID R&D. GAAP net income for 2021 was $8.4 million or $0.19 per diluted share compared to GAAP net income of $7.8 million or $0.18 diluted share in fiscal 2020. Non-GAAP net income increased 19% for the year to $34.2 million or $0.76 per diluted share compared to non-GAAP net income of $28.6 million or $0.67 per diluted share in 2020. The fully diluted share count for 2021 was 45.1 million for both GAAP and non-GAAP earnings per share. For the year, our non-GAAP adjustments include $11.5 million in stock compensation expense, $8.5 million of acquisition-related costs, $4.4 million in amortization of debt discount and issuance costs, $6 million in cash tax differences, $974,000 in litigation expense, and $428,000 in executive transition costs. This was all offset by income tax effect of pretax adjustments of $6 million. As of September 30, 2021, our headcount was 469 compared to 399 a year ago. Now let's turn to the balance sheet. We generated $12.3 million in cash flow from operations during the quarter and a record $37.4 million for the full year, bringing our total cash and investments to $227.4 million as of September 30. During the quarter, we repurchased approximately 10,000 shares for $190,000 at an average price of $17.97 per share. As a reminder, our Board authorized a $50 million share buyback program in June of 2021, which runs through June of 2022. In closing, we are very pleased with our results, which include record revenue for both the fourth quarter and our full fiscal year 2021 as well as our record non-GAAP net income and cash flow for the full fiscal year. We look forward to continuing to deliver amazing fraud prevention identity services and continue to support our customers globally.

Our first question comes from Bhavan Suri with William Blair & Company.

Mitek team, congratulations on a strong quarter. Let me begin with the Check Defender product. You launched it four months ago, and you mentioned that 20 of the top 25 have adopted it, which has remained consistent for a few quarters. I'm curious about how the sales process is going. Is it becoming an evangelical sale, or are customers recognizing it as a necessary tool? How much of the sales approach is driven by demand versus proactive marketing?

Yes, it's Max. Thank you for the comments and the question. Just as a reminder, Check Fraud Defender technology has been in place for about the last two years, and we had the fundamental components ready. We’ve had large banks as customers using it on-premise with significant assistance from our services team. What we announced back in May or June was our plan to move this technology to the cloud, enhance its security and scalability, make it available on AWS, and enable cross-tenant capabilities to analyze checks across various institutions. We invited those institutions to join this network, which is somewhat like a consortium. The progress we’ve made in terms of revenues and insights into ROI and operational efficiency stems from our experience with the on-prem solution. We have a subset of those institutions that have now joined the consortium. We continue to develop the product we announced in June, and we plan to have it available in the coming months. Regarding your question on the sales process, there is significant interest from those already experiencing the benefits of the on-prem solution, as they realize that expanding to a larger ecosystem could enhance their capabilities, especially among the top 20 to 25 banks. The process is somewhat more challenging with smaller, mid-sized banks since many of them haven't been exposed to it before. However, I can say that the interest from their side is strong. These are large banks that tend to proceed cautiously, often due to legal and compliance considerations. Nevertheless, as time goes on, I believe this will validate our expectations for future growth. Frank, do you have anything to add?

Yes, I want to emphasize the strong interest we've seen. As Max mentioned, the figures for check fraud in the U.S. are astonishing. There's significant curiosity about our approach. Our on-prem solution has performed exceptionally well historically. Therefore, as Max pointed out, for those who understand its functionality, there's a strong demand.

Yes. Yes. And I mean, I think obviously, the cloud solution where you can sort of see that cross-organization piece ultimately, and not saying it's happening soon, becomes a no-brainer. Let me turn to the ID verification side quickly here. I know you're not giving guidance, but two questions, I guess, or two parts of this question. One, I know you said 24% growth, but that's obviously sometime in the on-prem business. Can you give us some sense of what normalized growth was like ex the on-prem business, if I did like-for-like? And then what should we think of the growth rate of this business going forward? Sort of as we think about demand and usage heading into fiscal '22, are we thinking this is an acceleration-type business? How should we think about that without specific guidance, just frame us sort of what you see in the pipeline demand environment to offset that? So just kind of a quick numbers question and more something more strategic but sort of how that pipeline drives into growth for that business over, say, the next 12 to 18 months?

Yes, Bhavan, that's a great question. This is Frank, and I'll address the first part before handing it over to Max for the second question. We operate in a market that is experiencing strong growth. The need to get things right is becoming more critical. While we don't provide specific numbers or guidance, we believe, as we have stated previously, in the growth rates we anticipate from identity. We remain optimistic about the developments in IDV, especially with the addition of new products like multimodal biometrics, which enhances our ability to deepen our market presence. Overall, we feel confident about the direction of this business.

It's safe to say that if it was 24% with the legacy, the net on legacy is only superior to that. We can lift our heads up and then address your question about the pipeline. There have been some positive analyst reports that can benefit the IK Group. Juniper recently provided some insights. For the markets we serve, it's estimated that in 2021, the spending for IDV, which is not even identity authentication, just proofing for onboarding journeys for banks in the United States and Western Europe, is about an $800 million category. By 2025, that's projected to grow to approximately $1.2 billion, indicating a CAGR of around 15%. This figure does not even include biometrics, which, as mentioned in the prepared remarks, presents a potentially larger opportunity. If we consider a market growth of 15% or 20%, we believe we should be able to exceed that and capture more share in the segments and regions we are focused on. One point to highlight is that with ID R&D, those components typically end up on-prem and are licensed on a subscription basis. Net revenue is classified as identity revenue but will appear in the software section of our income statement. Some upcoming announcements related to identity authentication will be less transaction-driven in terms of revenue; they will be cloud-based and adhere more to traditional subscription models. Thus, you'll begin to see how the identity revenue contributes to growth at higher rates. This will arise from various sources as our portfolio evolves, which is already different from what we had a year ago and will continue to change over the next six to nine months.

Fair enough. Fair enough. I think just as a sort of reiterate this, I think over time, separating those two because there is obviously this concept of the check deposit business that takes check part aside sort of a business that has a headwind, which as checks ultimately tend to decline, whereas the ID verification obviously has much stronger secular tailwinds. It may help to separate those even if they are in sort of different buckets, but just conversationally. I appreciate the answers gentlemen and the candor.

Our next question comes from Mike Grondahl with Northland Securities Inc.

And did you say a rough number of revenue that came from Check Fraud Defender? And any sense on what average top 25 banks should be paying for the product in, let's say, a year?

Yes. So just as a reminder, the historical Check Fraud Defender has been this on-premise set of components that we help to assemble and do some services around. The new consortium network in the cloud is still a work in progress. We have a couple of charter customers that are working through that with us. The revenues in Q4 were minimal relative to the cloud-based Check Fraud Defender. Your question around how we would license and how we price it really comes back to the kind of incredible value that these institutions are getting from it. And so we've got those insights from the on-prem instances that are out there, and that's both very high dollars in Check Fraud prevention and a like high number of operational costs that get to be reduced because you don't need to have a whole bunch of humans running back and checking out these false positives on potential check fraud. And that obviously leads to better customer satisfaction and experience as well. So Frank, make sure I didn't miss anything.

Yes. No, I think that's right, Mike. Great speaking with you again. We're going to figure out as we go along. I think as Max indicated, if you look at the early results and the value they're seeing, I think as this thing grows and it kind of grows and gets to where we think it will be, it will be compelling. We're going to evolve the pricing, and we'll figure out as we go along. But I think what we can say with certainty is the value our customers are getting on-premise is significant.

Got it. Got it. In Mobile ID, any new use cases in the recent quarter?

Yes. I think Mobile ID is a very interesting space. So think of it this way. We're building a platform here that has dynamic as the market is. So if you think of use cases, the use cases are abundant in fraud prevention, as you know. So how we verify people, how we harmonize that identity physically and digitally to a device with a halo effect of a real-world authenticated government document, that's a compelling differentiator. And we think that that ability to combine identities, harmonize them to a real-world document, and then provide a higher degree of trust, as Max indicated, to our customers is compelling. I think it lends itself to all kinds of great potential new use cases, and we're working with our customers to see how we expand. As those use cases change, their fraud vectors are changing constantly, their requirements are changing constantly, where there is to adapt and try to figure it out with them. So I'd say there's a real opportunity there to proliferate that degree of trust that we provide to different use cases and different fraud vectors.

I would say, Mike, one of the things we're observing more consistently now is the introduction of Mobile Verify with some of the biometric features we've incorporated from ID R&D for the re-verification or rebinding of a device. The idea is that you have an established relationship with your financial service provider, whether it's a fintech or a big bank. When you get a new phone or lose your phone, you need to rebind that device. It becomes a key attribute that these institutions use to establish identity. Once you have a new phone, it has to be retethered to their records. Using both biometric data and a high assurance government-issued identity document, combined with facial recognition, is becoming a significant use case. I wouldn't necessarily classify this as new, as we've discussed it in previous quarters, but it is certainly gaining momentum.

Yes. I think of it this way, as Max indicated, these identity attributes have half-lives. And if you've got to have some way to reverify and remind that keeps the customers happy that they can still trust that combination of device behavior and identity. So it's good stuff.

Our next question comes from Hamzah Mazari with Jefferies.

This is Mario Cortellacci filling in for Hamzah. My first question is about new product introduction. Can you share what that will look like in identity and fraud over the next few months? Additionally, is growth mainly driven by introducing new use cases or by launching new products? Once a new product is released, how long does it typically take for it to start contributing to growth in a significant way?

Yes, let me address that question. To recap, we announced Check Fraud Defender around June. In October, ID LiveDocs was introduced at Money20/20 in Las Vegas. In the upcoming months, Mitek will present the identity authentication solution. Regarding your question about the approach we're taking with use cases versus products, we often discover new use cases with our existing products and solutions. We also observe related use cases, such as the binding and rebinding of devices. Currently, we can effectively bind devices using a face and a government-issued identity document, which is a strong offering. In the future, we aim to enhance this capability by allowing binding with just a face and a voice, with or without a government identity document. This represents an expanded use case, indicating the need to develop new products and capabilities. I hope that addresses your questions, but I may not have covered everything in detail.

That's very helpful. My follow-up question is about your acquisition pipeline. Could you provide a brief update on what it looks like in both the near and long term? Additionally, as you assess targets, are there any financial criteria you are considering, or is it primarily focused on capabilities and technology that could be integrated into your platform for enhanced product innovation?

That's a great question, Mario. Over the last 90 to 100 days since we last spoke, we've been very active in outreach and pursuing opportunities. Some of these have come to us because companies are for sale, but more often, it's been our proactive engagement in areas we identified as strategic for partnerships. As you know from your experience in banking, technology valuations have surged significantly, often seeming outrageous. Typically, we start by considering our strategy and the areas where we aim to enhance our offerings or fill gaps through acquisitions. We assess whether a potential acquisition fits our needs in terms of capability and effectiveness. It’s also crucial for us to find a cultural match with the organizations we partner with, much like our successful collaboration with ID R&D. Financial aspects are a challenge as well; we often encounter unrealistic growth expectations from prospective sellers, which affects their perceived value. However, we are not slowing down or giving up. We see this as a prime opportunity, and with new companies consistently appearing, we will continue to pursue these avenues.

Our next question comes from Allen Klee with Maxim Group.

This is Derek Greenberg on for Allen. With you guys is identity services, I was wondering if that's a profitability or not? And if not, what the path towards that looks like and when do you guys expect to achieve profitability?

It's Frank. Great speaking with you. We're building a disciplined model. We're well ahead of our profitability goals today. The Identity business is still consuming cash while the deposit business is a strong cash contributor. We're significantly ahead of schedule, and our expectation is that we will reach our goals about a year earlier than initially planned. We aim to achieve breakeven or positive cash flow for the identity business by the end of FY '23.

Awesome. And then one more, just how do you guys see your operating expenses growing in relation to revenues?

Slower than revenues.

Slower than revenues. We're going to make the right investments, as Max just indicated to kind of flesh out and extend the offering. But we're disciplined here in terms of how we look at it. So it will grow, but it will grow based on very deliberate specific investments, and it certainly won't match the revenue growth.

There are no further questions in the queue at this time. So I'd like to turn the call back over to Mr. Todd Kehrli for 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.

Thank you, ladies and gentlemen. This concludes today's teleconference, and we thank you for your participation. You may now disconnect.